Annual Reports

  • 20-F (Apr 30, 2014)
  • 20-F (Apr 30, 2013)
  • 20-F (May 25, 2012)
  • 20-F (Apr 30, 2012)
  • 20-F (Jul 20, 2011)
  • 20-F (Jun 27, 2011)

 
Other

Woori Finance Holdings Co 20-F 2008

Documents found in this filing:

  1. 20-F
  2. Ex-12.1
  3. Ex-13.1
  4. Graphic
  5. Graphic
  6. Graphic
Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on June 25, 2008

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2007

 

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                

For the transition period from             to

Commission file number 001-31811

 

Woori Finance Holdings Co., Ltd.

(Exact name of Registrant as specified in its charter)

 

Woori Finance Holdings Co., Ltd.

(Translation of Registrant’s name into English)

 

The Republic of Korea

(Jurisdiction of incorporation or organization)

203 Hoehyon-dong, 1-ga, Chung-gu, Seoul 100-792, Korea

(Address of principal executive offices)

Byung-Ho Park

203 Hoehyon-dong, 1-ga, Chung-gu, Seoul 100-792, Korea

Telephone No.: +82-2-2125-2110

Facsimile No.: +82-2-2125-2137

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class

 

Name of each exchange on which registered

American Depositary Shares, each representing three shares of Common Stock   New York Stock Exchange
Common Stock, par value (Won)5,000 per share   New York Stock Exchange*
* Not for trading, but only in connection with the registration of the American Depositary Shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

805,988,800 shares of Common Stock, par value (Won)5,000 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    x  Yes    ¨  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.    ¨  Yes    x  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

    x  Large accelerated filer    ¨  Accelerated Filer    ¨  Non-accelerated filer

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

    x  U.S. GAAP      ¨  IFRS      ¨  Other

Indicate by check mark which financial statement item the registrant has elected to follow.    ¨  Item 17    x  Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    ¨  Yes    ¨  No

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page

Presentation of Financial and Other Information

   1

Forward-Looking Statements

   2

Item 1.

   Identity of Directors, Senior Management and Advisers    3

Item 2.

   Offer Statistics and Expected Timetable    3

Item 3.

   Key Information    3
     Item 3A. Selected Financial Data    3
     Item 3B. Capitalization and Indebtedness    12
     Item 3C. Reasons for the Offer and Use of Proceeds    12
     Item 3D. Risk Factors    12

Item 4.

   Information on the Company    34
     Item 4A. History and Development of the Company    34
     Item 4B. Business Overview    42
     Item 4C. Organizational Structure    120
     Item 4D. Property, Plants and Equipment    122

Item 4.A.

   Unresolved Staff Comments    122

Item 5.

   Operating and Financial Review and Prospects    122
     Item 5A. Operating Results    122
     Item 5B. Liquidity and Capital Resources    151
     Item 5C. Research and Development, Patents and Licenses, etc.    169
     Item 5D. Trend Information    169
     Item 5E. Off-Balance Sheet Arrangements    169
     Item 5F. Tabular Disclosure of Contractual Obligations    169

Item 6.

   Directors, Senior Management and Employees    169
     Item 6A. Directors and Senior Management    169
     Item 6B. Compensation    172
     Item 6C. Board Practices    172
     Item 6D. Employees    176
     Item 6E. Share Ownership    177

Item 7.

   Major Stockholders and Related Party Transactions    179
     Item 7A. Major Stockholders    179
     Item 7B. Related Party Transactions    179
     Item 7C. Interest of Experts and Counsel    180

Item 8.

   Financial Information    180
     Item 8A. Consolidated Statements and Other Financial Information    180
     Item 8B. Significant Changes    182

Item 9.

   The Offer and Listing    182
     Item 9A. Offering and Listing Details    182
     Item 9B. Plan of Distribution    183
     Item 9C. Markets    184
     Item 9D. Selling Shareholders    191
     Item 9E. Dilution    191
     Item 9F. Expenses of the Issuer    191

Item 10.

   Additional Information    191
     Item 10A. Share Capital    191
     Item 10B. Memorandum and Articles of Association    192
     Item 10C. Material Contracts    198
     Item 10D. Exchange Controls    198
     Item 10E. Taxation    199
     Item 10F. Dividends and Paying Agents    204

 

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          Page

     Item 10G. Statements by Experts    204
     Item 10H. Documents on Display    204
     Item 10I. Subsidiary Information    204

Item 11.

   Quantitative and Qualitative Disclosures about Market Risk    204

Item 12.

   Description of Securities other than Equity Securities    232

Item 13.

   Defaults, Dividend Arrearages and Delinquencies    232

Item 14.

   Material Modifications to the Rights of Security Holders and Use of Proceeds    232

Item 15.

   Controls and Procedures    232

Item 16.

   Reserved    233
     Item 16A. Audit Committee Financial Expert    233
     Item 16B. Code of Ethics    233
     Item 16C. Principal Accountant Fees and Services    234
     Item 16D. Exemptions from the Listing Standards for Audit Committees    234
     Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers    234

Item 17.

   Financial Statements    235

Item 18.

   Financial Statements    235

Item 19.

   Exhibits    236

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

 

Unless indicated otherwise, the financial information in this annual report as of and for the years ended December 31, 2003, 2004, 2005, 2006 and 2007 has been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP.

 

On October 26 and December 24, 2004, we acquired an aggregate 27.3% voting interest in LG Investment & Securities, or LGIS. As a result of the acquisition, LGIS became an equity method investee as of December 24, 2004. On March 31, 2005, we merged Woori Securities, our wholly-owned subsidiary, into LGIS and renamed the surviving entity Woori Investment & Securities, which became an equity method investee.

 

In this annual report:

 

   

references to “we,” “us” or “Woori Finance Holdings” are to Woori Finance Holdings Co., Ltd. and, unless the context otherwise requires, its subsidiaries;

 

   

references to “Korea” are to the Republic of Korea;

 

   

references to the “government” are to the government of the Republic of Korea;

 

   

references to “Won” or “(Won)” are to the currency of Korea; and

 

   

references to “U.S. dollars,” “$” or “US$” are to United States dollars.

 

Discrepancies between totals and the sums of the amounts contained in any table may be a result of rounding.

 

For your convenience, this annual report contains translations of Won amounts into U.S. dollars at the noon buying rate of the Federal Reserve Bank of New York for Won in effect on December 31, 2007, which was (Won)935.8 = US$1.00.

 

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FORWARD-LOOKING STATEMENTS

 

The U.S. Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This annual report contains forward-looking statements.

 

Words and phrases such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “estimate,” “expect,” “future,” “goal,” “intend,” “may,” “objective,” “plan,” “positioned,” “predict,” “project,” “risk,” “seek to,” “shall,” “should,” “will likely result,” “will pursue,” “plan” and words and terms of similar substance used in connection with any discussion of future operating or financial performance or our expectations, plans, projections or business prospects identify forward-looking statements. In particular, the statements under the headings “Item 3D. Risk Factors,” “Item 5. Operating and Financial Review and Prospects” and “Item 4B. Business Overview” regarding our financial condition and other future events or prospects are forward-looking statements. All forward-looking statements are management’s present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

 

In addition to the risks related to our business discussed under “Item 3D. Risk Factors,” other factors could cause actual results to differ materially from those described in the forward-looking statements. These factors include, but are not limited to:

 

   

our ability to successfully implement our strategy;

 

   

future levels of non-performing loans;

 

   

our growth and expansion;

 

   

the adequacy of allowance for credit and investment losses;

 

   

technological changes;

 

   

interest rates;

 

   

investment income;

 

   

availability of funding and liquidity;

 

   

our exposure to market risks; and

 

   

adverse market and regulatory conditions.

 

By their nature, certain disclosures relating to these and other risks are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains, losses or impact on our income or results of operations could materially differ from those that have been estimated. For example, revenues could decrease, costs could increase, capital costs could increase, capital investment could be delayed and anticipated improvements in performance might not be fully realized.

 

In addition, other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this annual report could include, but are not limited to:

 

   

general economic and political conditions in Korea or other countries that have an impact on our business activities or investments;

 

   

the monetary and interest rate policies of Korea;

 

   

inflation or deflation;

 

   

unanticipated volatility in interest rates;

 

   

foreign exchange rates;

 

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prices and yields of equity and debt securities;

 

   

the performance of the financial markets in Korea and globally;

 

   

changes in domestic and foreign laws, regulations and taxes;

 

   

changes in competition and the pricing environment in Korea; and

 

   

regional or general changes in asset valuations.

 

For further discussion of the factors that could cause actual results to differ, see the discussion under “Item 3D. Risk Factors” contained in this annual report. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this annual report. Except as required by law, we are not under any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

 

All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this annual report.

 

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not Applicable

 

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not Applicable

 

Item 3. KEY INFORMATION

 

Item 3A. Selected Financial Data

 

Unless otherwise indicated, the selected consolidated financial and operating data set forth below as of and for the years ended December 31, 2003, 2004, 2005, 2006 and 2007 have been derived from our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP and audited by Deloitte Anjin LLC, an independent registered public accounting firm.

 

You should read the following data together with the more detailed information contained in “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements included elsewhere in this annual report. Historical results do not necessarily predict future results.

 

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Table of Contents

Consolidated Income Statement Data

 

     Year ended December 31,  
     2003     2004 (1)     2005 (1)     2006    2007     2007 (2)  
     (in billions of Won except per share data)     (in millions of
US$ except per
share data)
 

Interest and dividend income

   (Won) 7,520     (Won) 7,235     (Won) 7,209     (Won) 9,365    (Won) 12,192     US$ 13,029  

Interest expense

     4,117       3,809       3,727       5,465      7,656       8,181  
                                               

Net interest income

     3,403       3,426       3,482       3,900      4,536       4,848  

Provision for loan losses

     2,313       652       308       509      219       234  

Provision for credit-related commitments (reversal of provision) (3)

     201       43       (39 )     107      (54 )     (58 )

Other provision (reversal of provision) (4)

     102       (6 )     17       36      36       39  

Non-interest income

     1,435       1,953       1,916       2,424      2,222       2,374  

Non-interest expense

     2,636       2,809       2,933       3,098      3,467       3,705  

Income tax expense (benefit)

     254       (392 )     366       620      837       895  

Minority interest

     4       1       7       3      11       12  
                                               

Income (loss) before extraordinary items

     (672 )     2,272       1,806       1,951      2,242       2,395  

Extraordinary gain

     —         63       —         —        —         —    

Net income (loss)

     (672 )     2,335       1,806       1,951      2,242       2,395  

Other comprehensive income (loss), net of tax

     97       107       106       477      (146 )     (156 )

Comprehensive income (loss)

   (Won) (575 )   (Won) 2,442     (Won) 1,912     (Won) 2,428    (Won) 2,096     US$ 2,239  
                                               

Per common share data:

             

Net income (loss) per share—basic

   (Won) (871 )   (Won) 3,001     (Won) 2,245     (Won) 2,420    (Won) 2,781     US$ 2.97  

Income (loss) per share before extraordinary items—basic

     (871 )     2,920       2,245       2,420      2,781       2.97  

Extraordinary item—basic

     —         81       —         —        —         —    

Weighted average common shares outstanding—basic (in thousands)

     771,724       778,167       804,389       806,013      806,000       806,000  

Net income (loss) per share—diluted (5)

   (Won) (871 )   (Won) 2,926     (Won) 2,241     (Won) 2,420    (Won) 2,781     US$ 2.97  

Income (loss) per share before extraordinary items—diluted

     (871 )     2,848       2,241       2,420      2,781       2.97  

Extraordinary item—diluted

     —         78       —         —        —         —    

Weighted average common shares outstanding—diluted (in thousands)

     771,724       799,233       805,866       806,013      806,000       806,000  

Cash dividends paid per share (6)

   (Won) 100     (Won) 150     (Won) 400     (Won) 600    (Won) 250     US$ 0.27  

 

(1)

On October 26 and December 24, 2004, we acquired an aggregate 27.3% voting interests in LGIS. As a result of the acquisition, LGIS became an equity method investee as of December 24, 2004. On March 31, 2005, we merged Woori Securities, our wholly-owned subsidiary, into LGIS and renamed the surviving entity Woori Investment & Securities, which became an equity method investee. Accordingly, income statement data for 2004 do not reflect the full-year results of operations of LGIS for 2004, while income statement data for 2005 reflect the three-month results of operations of Woori Securities (prior to its merger with LGIS), as a consolidated subsidiary, and the three-month results of operations of LGIS (prior to the merger) and the nine-month results of operations of Woori Investment & Securities (following the merger), each as an equity method investee.

(2)

Won amounts are expressed in U.S. dollars at the rate of (Won)935.8 to US$1.00, the noon buying rate in effect on December 31, 2007 as quoted by the Federal Reserve Bank of New York in the United States.

(3)

The reversal of provisions in 2005 resulted from subsequent changes in our estimation of losses related to our credit-related commitments. We determined in 2005 that a portion of our allowances for losses on credit-related commitments were no longer needed, and accordingly reversed the related portions of the provisions we had initially allocated during the year.

(4)

Mainly consists of provisions relating to (a) repurchase obligations with respect to loans sold to the Korea Asset Management Corporation and (b) trade receivables. The reversal of provision in 2004 resulted from subsequent changes in our estimation of losses related to loans sold to the Korea Asset Management Corporation.

(5)

In the diluted earnings per share calculation, our convertible bonds outstanding in 2004 and 2005 are assumed to have been converted into shares of our common stock, while options outstanding to purchase our common stock in 2003, 2004, 2005, 2006 and 2007 are not deemed to have been exercised. Convertible debentures issued by Woori Financial, a subsidiary we acquired in September 2007, were included in the diluted earnings per share calculation for 2007, while stock-based compensation awards of Woori Financial were excluded from the diluted earnings per share calculation due to their anti-dilutive effect. See Note 32 of the notes to our consolidated financial statements.

 

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Table of Contents

(6)

Amounts shown for each year are cash dividends per share relating to such year, which were declared and paid in the following year. U.S. GAAP requires that dividends be recorded in the period in which they are declared rather than the period to which they relate unless those periods are the same. With respect to the 2003 fiscal year, we paid dividends in 2004 of (Won)100 per common share ($0.08 per common share at the noon buying rate in effect on December 31, 2003) to our stockholders, including the Korea Deposit Insurance Corporation, or the KDIC. With respect to the 2004 fiscal year, we paid dividends in 2005 of (Won)150 per common share ($0.14 per common share at the noon buying rate in effect on December 31, 2004) to our stockholders, including the KDIC. With respect to the 2005 fiscal year, we paid dividends in 2006 of (Won)400 per common share ($0.40 per common share at the noon buying rate in effect on December 30, 2005) to our stockholders, including the KDIC. With respect to the 2006 fiscal year, we paid dividends in 2007 of (Won)600 per common share ($0.65 per common share at the noon buying rate in effect on December 29, 2006) to our stockholders, including the KDIC. With respect to the 2007 fiscal year, we paid dividends in 2008 of (Won)250 per common share ($0.27 per common share at the noon buying rate in effect on December 31, 2007) to our stockholders, including the KDIC. See “Item 8A. Consolidated Statements and Other Financial Information—Dividends.”

 

Consolidated Balance Sheet Data

 

     As of December 31,
     2003    2004    2005    2006    2007    2007 (1)
     (in billions of Won)   

(in millions

of US$)

Assets

                 

Cash and cash equivalents (2)

   (Won) 5,399    (Won) 4,315    (Won) 8,280    (Won) 7,935    (Won) 11,553    US$ 12,345

Restricted cash (2)(3)

     373      388      376      243      131      140

Interest-earning deposits in other banks

     1,640      990      1,553      1,582      2,128      2,274

Call loans and securities purchased under resale agreements

     1,127      1,499      1,426      940      1,695      1,812

Trading assets

     4,291      6,989      4,889      7,576      12,173      13,008

Available-for-sale securities

     12,408      12,302      18,288      28,174      27,235      29,103

Held-to-maturity securities (fair value of (Won)10,143 billion in 2003, (Won)8,763 billion in 2004, (Won)9,613 billion in 2005, (Won)8,595 billion in 2006 and (Won)8,120 billion ($8,677 million) in 2007)

     9,801      8,406      9,638      8,614      8,216      8,780

Other investment assets (4)

     793      1,138      1,397      1,568      2,051      2,192

Loans (net of allowance for loan losses of (Won)2,834 billion in 2003, (Won)1,806 billion in 2004, (Won)1,525 billion in 2005, (Won)1,855 billion in 2006 and (Won)1,736 billion ($1,855 million) in 2007)

     85,587      88,705      102,630      131,928      158,130      168,978

Due from customers on acceptances

     421      338      355      267      249      266

Premises and equipment, net

     2,151      2,110      2,060      2,149      2,399      2,564

Accrued interest and dividends receivable

     747      558      703      865      950      1,015

Assets held for sale

     —        26      49      81      132      141

Goodwill

     25      22      48      38      232      248

Other assets (5)

     2,850      3,128      3,223      3,121      3,601      3,848
                                         

Total assets

   (Won) 127,613    (Won) 130,914    (Won) 154,915    (Won) 195,081    (Won) 230,875    US$  246,714
                                         

Liabilities

                 

Deposits

                 

Interest-bearing

   (Won) 85,482    (Won) 86,339    (Won) 99,609    (Won) 121,688    (Won) 140,359    US$ 149,989

Non-interest-bearing

     3,521      3,714      4,538      4,851      4,668      4,989
                                         

Total deposits

     89,003      90,053      104,147      126,539      145,027      154,978

Call money

     412      689      326      2,270      3,008      3,215

Trading liabilities

     473      1,628      1,339      1,701      2,981      3,185

Acceptances outstanding

     421      338      355      267      249      266

Other borrowed funds

     9,345      9,115      9,909      12,025      13,932      14,888

Secured borrowings

     4,321      2,352      2,557      2,629      3,486      3,725

Long-term debt

     14,917      15,662      21,850      32,298      41,336      44,172

Accrued interest payable

     1,618      1,713      1,721      2,340      2,892      3,091

Other liabilities (3)(6)

     3,218      2,862      4,379      4,531      5,494      5,869
                                         

Total liabilities

     123,728      124,412      146,583      184,600      218,405      233,389

Minority interest

     229      38      11      55      356      380

Total stockholders’ equity

     3,656      6,464      8,321      10,426      12,114      12,945
                                         

Total liabilities, minority interest and stockholders’ equity

   (Won) 127,613    (Won) 130,914    (Won) 154,915    (Won) 195,081    (Won) 230,875    US$ 246,714
                                         

 

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(1)

Won amounts are expressed in U.S. dollars at the rate of (Won)935.8 to US$1.00, the noon buying rate in effect on December 31, 2007 as quoted by the Federal Reserve Bank of New York in the United States.

(2)

In 2005, we changed our accounting policy with respect to the composition of cash and cash equivalents to include reserve deposits with the Bank of Korea and certain foreign banks. Such balances were previously classified as restricted cash. Amounts for prior periods have been reclassified accordingly. See “Item 5B. Liquidity and Capital Resources—Financial Condition—Assets” and Note 1 of the notes to our consolidated financial statements.

(3)

Commencing with the year ended December 31, 2007, we have reclassified deposits for severance payments from restricted cash to other liabilities. See Notes 5 and 21 of the notes to our consolidated financial statements.

(4)

For a description of “other investment assets,” see Note 10 of the notes to our consolidated financial statements.

(5)

For a description of “other assets,” see Note 16 of the notes of our consolidated financial statements.

(6)

For a description of “other liabilities,” see Note 21 of the notes to our consolidated financial statements.

 

Profitability Ratios and Other Data

 

     Year ended December 31,  
     2003     2004     2005     2006     2007  
     (in billions of Won except percentages)  

Return on average assets (1)

     (0.56 )%     1.81 %     1.28 %     1.13 %     1.03 %

Return on average equity (2)

     (17.17 )     50.69       24.45       18.70       20.41  

Net interest spread (3)

     2.88       2.68       2.59       2.37       2.16  

Net interest margin (4)

     3.01       2.84       2.73       2.50       2.28  

Cost-to-income ratio (5)

     54.49       52.22       54.33       48.99       51.30  

Average stockholders’ equity as a percentage of average total assets

     3.25       3.56       5.25       6.06       5.05  

Total revenue (6)

   (Won) 8,955     (Won) 9,188     (Won) 9,125     (Won) 11,789     (Won) 14,414  

Operating expense (7)

     6,753       6,618       6,660       8,563       11,123  

Operating margin (8)

     2,202       2,570       2,465       3,226       3,291  

Operating margin as a percentage of total revenue

     24.59 %     27.97 %     27.01 %     27.36 %     22.83 %

 

(1)

Represents net income (loss) as a percentage of average total assets. Average balances are based on daily balances for all of our subsidiaries, except for Woori SB Asset Management, Woori Finance Information System, Woori Credit Information and our special purpose companies, which are based on quarterly balances.

(2)

Represents net income (loss) as a percentage of average stockholders’ equity. Average balances are based on daily balances for all of our subsidiaries, except for Woori SB Asset Management, Woori Finance Information System, Woori Credit Information and our special purpose companies, which are based on quarterly balances.

(3)

Represents the difference between the yield on average interest-earning assets and cost of average interest-bearing liabilities.

(4)

Represents the ratio of net interest income to average interest-earning assets.

(5)

Represents the ratio of non-interest expense to the sum of net interest income and non-interest income.

(6)

Total revenue represents interest and dividend income plus non-interest income.

 

The following table shows how total revenue is calculated:

 

     Year ended December 31,
     2003    2004    2005    2006    2007
     (in billions of Won)

Interest and dividend income

   (Won) 7,520    (Won) 7,235    (Won) 7,209    (Won) 9,365    (Won) 12,192

Non-interest income

     1,435      1,953      1,916      2,424      2,222
                                  

Total revenue

   (Won) 8,955    (Won) 9,188    (Won) 9,125    (Won) 11,789    (Won) 14,414
                                  

(7)

Operating expense represents interest expense plus non-interest expense, excluding provisions of (Won)2,616 billion, (Won)689 billion, (Won)286 billion, (Won)652 billion and (Won)201 billion for 2003, 2004, 2005, 2006 and 2007, respectively.

 

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The following table shows how operating expense is calculated:

 

     Year ended December 31,
     2003    2004    2005    2006    2007
     (in billions of Won)

Interest expense

   (Won) 4,117    (Won) 3,809    (Won) 3,727    (Won) 5,465    (Won) 7,656

Non-interest expense

     2,636      2,809      2,933      3,098      3,467
                                  

Operating expense

   (Won) 6,753    (Won) 6,618    (Won) 6,660    (Won) 8,563    (Won) 11,123
                                  

(8)

Operating margin represents total revenue less operating expenses.

 

Asset Quality Data

 

     As of December 31,  
     2003     2004     2005     2006     2007  
     (in billions of Won)  

Total loans

   (Won) 88,392     (Won) 90,489     (Won) 104,130     (Won) 133,740     (Won) 159,885  

Total non-performing loans (1)

     2,594       2,071       1,369       1,354       1,121  

Other impaired loans not included in non-performing loans

     1,861       1,129       820       391       274  

Total non-performing loans and other impaired loans

     4,455       3,200       2,189       1,745       1,395  

Total allowance for loan losses

     2,834       1,806       1,525       1,855       1,736  

Non-performing loans as a percentage of total loans

     2.93 %     2.29 %     1.31 %     1.01 %     0.70 %

Non-performing loans as a percentage of total assets

     2.03       1.58       0.88       0.69       0.48  

Total non-performing loans and other impaired loans as a percentage of total loans

     5.04       3.54       2.10       1.30       0.87  

Allowance for loan losses as a percentage of total loans

     3.21       2.00       1.46       1.39       1.09  

 

(1)

Non-performing loans are defined as those loans that are classified as substandard or below based on the Financial Services Commission’s asset classification criteria. See “Item 4B. Business Overview—Assets and Liabilities—Asset Quality of Loans—Loan Classifications.”

 

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Segment Information Under Korean GAAP

 

The following table sets forth financial data under Korean GAAP as of or for the year ended December 31, 2007 for our business segments:

 

    Woori Bank     Kyongnam
Bank
    Kwangju
Bank
    Credit card
operations
    Securities
brokerage
services (1)
    Other     Elimination (2)     Total  
    (in billions of Won)  

Interest and dividend income

  (Won) 9,969     (Won) 1,009     (Won) 868     (Won) 693     (Won) 549     (Won) 91     (Won) (63 )   (Won) 13,116  

Interest expense

    6,245       591       532       95       342       155       (40 )     7,920  
                                                               

Net interest income (loss)

    3,724       418       336       598       207       (64 )     (23 )     5,196  

Provision for loan losses and credit- related commitments (reversal of provision)

    589       38       50       79       0       4       14       774  

Non-interest Income

    10,378       344       119       29       2,561       2,641       (2,414 )     13,658  

Non-interest expenses

    11,133       493       246       377       2,370       284       (246 )     14,657  
                                                               

Net non-interest income (loss)

    (755 )     (149 )     (127 )     (348 )     191       2,357       (2,168 )     (999 )

Depreciation and amortization

    158       10       8       0       19       173       11       379  
                                                               

Net income (loss) before tax

    2,222       221       151       171       379       2,116       (2,216 )     3,044  

Income tax expense (benefit)

    567       60       40       47       115       21       (16 )     834  

Minority interest

    1       0       0       0       0       1       181       183  
                                                               

Net income (loss) for the period under Korean GAAP

    1,654       161       111       124       264       2,094       (2,381 )     2,027  

U.S. GAAP adjustments

    110       51       (22 )     5       91       27       (47 )     (215 )
                                                               

Consolidated net income

  (Won) 1,764     (Won) 212     (Won) 89     (Won) 129     (Won) 355     (Won) 2,121     (Won) (2,428 )   (Won) 2,242  
                                                               

Segments’ total assets under Korean GAAP

  (Won) 196,210     (Won) 19,339     (Won) 15,294     (Won) 2,615     (Won) 15,173     (Won) 16,067     (Won) (15,078 )   (Won) 249,620  

U.S. GAAP adjustments

    (5,451 )     (364 )     (52 )     7       (14,436 )     2,507       (956 )     (18,745 )
                                                               

Segments’ total assets

  (Won) 190,759     (Won) 18,975     (Won) 15,242     (Won) 2,622     (Won) 737     (Won) 18,574     (Won) (16,034 )   (Won) 230,875  
                                                               

 

(1)

Includes the operations of Woori Investment & Securities, which is not a consolidated subsidiary under U.S. GAAP. We acquired a 27.3% voting interest in LGIS in October and December 2004. As a result of this acquisition, LGIS became a consolidated subsidiary under Korean GAAP (but not under U.S. GAAP) effective December 24, 2004. On March 31, 2005, we merged Woori Securities, a wholly-owned subsidiary, into LGIS and renamed the surviving entity Woori Investment & Securities, which remained a consolidated subsidiary under Korean GAAP (but not under U.S. GAAP).

(2)

Includes eliminations for consolidation, intersegment transactions and certain differences in classification under the management reporting system.

 

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Selected Financial Information

 

Average Balance Sheets and Related Interest

 

The following tables show our average balances and interest rates for 2005, 2006 and 2007:

 

    Year ended December 31,  
    2005     2006     2007  
    Average
Balance (1)
    Interest
Income (2)(3)
  Average
Yield
    Average
Balance (1)
    Interest
Income (2)(3)
  Average
Yield
    Average
Balance (1)
    Interest
Income (2)(3)
  Average
Yield
 
    (in billions of Won except percentages)  

Assets

                 

Interest-earning assets

                 

Interest-earning deposits in other banks

  (Won) 1,527     (Won) 46   2.98 %   (Won) 1,387     (Won) 49   3.56 %   (Won) 2,431     (Won) 82   3.38 %

Call loans and securities purchased under resale agreements

    2,003       64   3.20       1,833       67   3.64       2,800       95   3.38  

Trading securities (4)

    4,210       158   3.76       5,681       216   3.80       9,894       390   3.94  

Investment securities (4)

    24,296       1,214   5.00       27,091       1,473   5.44       35,764       1,996   5.58  

Loans

                 

Commercial and industrial

    45,667       2,719   5.95       56,055       3,528   6.29       74,505       4,751   6.38  

Lease financing

    91       5   5.45       49       4   8.33       184       20   11.04  

Trade financing

    7,331       305   4.16       8,041       394   4.90       8,613       426   4.95  

Other commercial

    4,317       299   6.91       3,910       377   9.63       5,899       337   5.71  

General purpose household (5)

    32,112       1,900   5.92       46,032       2,733   5.94       54,198       3,545   6.54  

Mortgage

    5,187       276   5.32       5,027       303   6.03       3,366       231   6.87  

Credit cards (3)

    878       223   25.41       644       221   34.29       874       319   36.52  
                                               

Total Loans (6)

    95,583       5,727   5.99 %     119,758       7,560   6.31 %     147,639       9,629   6.52 %
                                               

Total average interest-earning assets

    127,619       7,209   5.65 %     155,750       9,365   6.01 %     198,528       12,192   6.14 %

Non-interest-earning assets

                 

Cash and cash equivalents

    4,031       —     —         4,680       —     —         7,528       —     —    

Foreign exchange contracts and derivatives

    933       —     —         1,153       —     —         1,676       —     —    

Premises and equipment

    2,081       —     —         1,999       —     —         2,263       —     —    

Due from customers on acceptance

    346       —     —         311       —     —         258       —     —    

Allowance for loan losses

    (1,557 )     —     —         (768 )     —     —         (1,699 )     —     —    

Other non-interest-earning assets (7)

    7,349       —     —         8,971       —     —         9,140       —     —    
                                               

Total average non-interest-earning assets

    13,183       —     —         16,346       —     —         19,166       —     —    
                                               

Total average assets

  (Won) 140,802     (Won) 7,209   5.12 %   (Won) 172,096     (Won) 9,365   5.44 %   (Won) 217,694     (Won) 12,192   5.60 %
                                               

 

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    Year ended December 31,  
    2005     2006     2007  
    Average
Balance (1)
  Interest
Expense
  Average
Cost
    Average
Balance (1)
  Interest
Expense
  Average
Cost
    Average
Balance (1)
  Interest
Expense
  Average
Cost
 
    (in billions of Won, except percentages)  

Liabilities

                 

Interest-bearing liabilities

                 

Deposits:

                 

Demand deposits

  (Won) 21,271   (Won) 42   0.20 %   (Won) 24,248   (Won) 57   0.23 %   (Won) 24,912   (Won) 68   0.27 %

Savings deposits

    9,795     271   2.77       10,900     367   3.37       11,306     346   3.06  

Certificate of deposit accounts

    6,931     259   3.73       10,525     489   4.64       19,618     993   5.06  

Other time deposits

    52,277     1,898   3.63       61,814     2,570   4.16       76,989     3,502   4.55  

Mutual installment deposits

    761     31   4.05       596     21   3.65       455     16   3.59  
                                         

Total deposits

    91,035     2,501   2.75       108,083     3,504   3.24       133,280     4,925   3.70  

Call money

    934     29   3.08       1,703     71   4.15       1,965     96   4.90  

Borrowings from the Bank of Korea

    1,258     25   2.00       1,369     34   2.46       1,035     30   2.94  

Other short-term borrowings

    9,194     269   2.92       9,582     418   4.38       13,124     594   4.52  

Secured borrowings

    2,839     114   4.03       2,506     115   4.58       4,018     180   4.47  

Long-term debt

    16,494     789   4.78       26,979     1,323   4.90       38,817     1,831   4.72  
                                         

Total average interest-bearing liabilities

    121,754     3,727   3.06       150,222     5,465   3.64       192,239     7,656   3.98  

Non-interest-bearing liabilities

                 

Demand deposits

    3,704     —     —         3,513     —     —         4,618     —     —    

Foreign exchange contracts and derivatives

    2,733     —     —         2,906     —     —         2,958     —     —    

Acceptances outstanding

    347     —     —         311     —     —         258     —     —    

Other non-interest-bearing liabilities

    4,876     —     —         4,709     —     —         6,634     —     —    
                                         

Total average non-interest-bearing liabilities

    11,660     —     —         11,439     —     —         14,468     —     —    
                                         

Total average liabilities

    133,414     3,727   2.79       161,661     5,465   3.38       206,707     7,656   3.70  

Average stockholders’ equity

    7,388     —     —         10,435     —     —         10,987     —     —    
                                         

Total average liabilities and stockholders’ equity

  (Won) 140,802   (Won) 3,727   2.65     (Won) 172,096   (Won) 5,465   3.18     (Won) 217,694   (Won) 7,656   3.52  
                                         

 

(1)

Average balances are based on daily balances for all of our subsidiaries, except for Woori F&I, Woori SB Asset Management, Woori Finance Information System, Woori Credit Information and our special purpose companies, which are based on quarterly balances.

(2)

Includes dividends received on securities, as well as cash interest received on non-accruing loans.

(3)

Interest income from credit cards is derived from interest-earning credit card receivables, and consists principally of interest on cash advances and card loans.

(4)

We do not invest in any tax-exempt securities.

(5)

Includes home equity loans.

(6)

Includes non-accrual loans.

(7)

Includes non-interest-earning credit card receivables, principally monthly lump-sum purchase receivables, the entire balances of which are subject to repayment on the following payment due date.

 

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Analysis of Changes in Net Interest Income—Volume and Rate Analysis

 

The following table provides an analysis of changes in interest income, interest expense and net interest income based on changes in volume and changes in rate for 2006 compared to 2005 and 2007 compared to 2006. Information is provided with respect to: (1) effects attributable to changes in volume (changes in volume multiplied by prior rate) and (2) effects attributable to changes in rate (changes in rate multiplied by prior volume). Changes attributable to the combined impact of changes in rate and volume have been allocated proportionately to the changes due to volume changes and changes due to rate changes.

 

     2006 vs. 2005
Increase/(decrease)
due to changes in
    2007 vs. 2006
Increase/(decrease)
due to changes in
 
     Volume     Rate     Total     Volume     Rate     Total  
     (in billions of Won)  

Interest-earning assets

            

Interest-earning deposits in other banks

   (Won) (4 )   (Won) 8     (Won) 4     (Won) 37     (Won) (4 )   (Won) 33  

Call loans and securities purchased under resale agreements

     (5 )     8       3       35       (7 )     28  

Trading securities

     55       2       57       160       14       174  

Investment securities

     140       119       259       472       50       522  

Loans

            

Commercial and industrial

     619       189       808       1,161       63       1,224  

Lease financing

     (2 )     1       (1 )     11       5       16  

Trade financing

     30       59       89       28       4       32  

Other commercial

     (28 )     106       78       192       (232 )     (40 )

General purpose household (1)

     824       9       833       485       327       812  

Mortgage

     (9 )     36       27       (100 )     28       (72 )

Credit cards

     (59 )     57       (2 )     79       19       98  
                                                

Total interest income

     1,561       595       2,156       2,560       267       2,827  

Interest-bearing liabilities

            

Deposits

            

Demand deposits

     6       8       14       2       10       12  

Savings deposits

     31       65       96       14       (35 )     (21 )

Certificate of deposit accounts

     134       96       230       422       82       504  

Other time deposits

     346       326       672       631       301       932  

Mutual installment deposits

     (7 )     (2 )     (9 )     (5 )     (1 )     (6 )

Call money

     24       18       42       11       14       25  

Borrowings from the Bank of Korea

     2       7       9       (8 )     5       (3 )

Other short-term borrowings

     10       140       150       155       19       174  

Secured borrowings

     (13 )     13       0       69       (4 )     65  

Long-term debt

     502       32       534       580       (71 )     509  
                                                

Total interest expense

     1,035       703       1,738       1,871       320       2,191  
                                                

Net interest income

   (Won) 526     (Won) (108 )   (Won) 418     (Won) 686     (Won) (53 )   (Won) 636  
                                                

 

(1)

Includes home equity loans.

 

Exchange Rates

 

The table below sets forth, for the periods and dates indicated, information concerning the noon buying rate for Won, expressed in Won per one U.S. dollar. The “noon buying rate” is the rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, translations of Won amounts into U.S. dollars in this annual report were made at the noon buying rate in effect on December 31, 2007, which was (Won)935.8 to US$1.00. We do not intend to imply that

 

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the Won or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Won, as the case may be, at any particular rate, or at all. On June 23, 2008, the noon buying rate was (Won)1,036.8 = US$1.00.

 

     Won per U.S. dollar (noon buying rate)
     Low    High    Average (1)    Period-End

2003

   (Won) 1,146.0    (Won) 1,262.0    (Won) 1,193.0    (Won) 1,192.0

2004

     1,035.1      1,195.1      1,139.3      1,035.1

2005

     997.0      1,059.8      1,023.8      1,010.0

2006

     913.7      1,002.9      954.3      930.0

2007

     903.2      950.2      942.1      935.8

December

     918.9      935.8      931.1      935.8

2008 (through June 23, 2008)

           

January

     935.2      953.2      942.1      943.4

February

     937.2      948.2      943.9      942.8

March

     947.1      1,021.5      981.7      988.6

April

     973.5      1,005.0      986.9      1,005.0

May

     1,004.0      1,047.0      1,034.1      1,028.5

June (through June 23)

     1,016.8      1,044.0      1,029.0      1,036.8

 

Source: Federal Reserve Bank of New York.

(1)

The average of the daily noon buying rates of the Federal Reserve Bank in effect during the relevant period (or portion thereof).

 

Item 3B. Capitalization and Indebtedness

 

Not Applicable

 

Item 3C. Reasons for the Offer and Use of Proceeds

 

Not Applicable

 

Item 3D. Risk Factors

 

Risks relating to our corporate credit portfolio

 

The largest portion of our exposure is to small- and medium-sized enterprises, and financial difficulties experienced by companies in this segment may result in a deterioration of our asset quality and have an adverse impact on us.

 

Our loans to small- and medium-sized enterprises increased from (Won)40,198 billion, or 44.4% of our total loans, as of December 31, 2004 to (Won)68,077 billion, or 42.6% of our total loans, as of December 31, 2007. As of December 31, 2007, on a Korean GAAP basis, Won-denominated loans to small- and medium-sized enterprises that were classified as substandard or below were (Won)593 billion, representing 0.9% of such loans to those enterprises. On a Korean GAAP basis, we recorded charge-offs of (Won)157 billion in respect of our Won-denominated loans to small- and medium-sized enterprises in 2007, compared to charge-offs of (Won)107 billion in 2006. The industry-wide delinquency ratios for Won-denominated loans to small- and medium-sized enterprises rose from 2002 through 2004, although these delinquency ratios stabilized in 2005 and decreased in 2006 and 2007. As of December 31, 2006, the delinquency ratio for loans to small- and medium-sized enterprises was calculated as the ratio of (1) the outstanding balance of such loans in respect of which either principal payments are overdue by one day or more or interest payments are overdue by 14 days or more (unless prior interest payments on a loan were made late on more than three occasions, in which case the loan is considered delinquent if interest payments are overdue by one day or more) to (2) the aggregate outstanding balance of such loans. From January 1, 2007, the delinquency ratio for small- and medium-sized enterprises is calculated as the

 

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ratio of (1) the outstanding balance of such loans in respect of which either principal or interest payments are over due by one month or more to (2) the aggregate outstanding balance of such loans. Our delinquency ratio for such loans denominated in Won on a Korean GAAP basis increased from 1.7% as of December 31, 2002 to 2.7% as of December 31, 2004, but decreased to 1.9% as of December 31, 2005, to 1.4% as of December 31, 2006 and further decreased under the new method of calculation to 0.9% as of December 31, 2007. Despite such decreases, our delinquency ratio may increase in 2008 as a result of, among other things, adverse economic conditions in Korea and, accordingly, we may be required to take measures to decrease our exposures to these customers.

 

Many small- and medium-sized enterprises represent sole proprietorships or very small businesses dependent on a relatively limited number of suppliers or customers and tend to be affected to a greater extent than large corporate borrowers by fluctuations in the Korean economy. In addition, small- and medium-sized enterprises often maintain less sophisticated financial records than large corporate borrowers. Therefore, it is generally more difficult for us to judge the level of risk inherent in lending to these enterprises, as compared to large corporations.

 

Financial difficulties experienced by small- and medium-sized enterprises as a result of, among other things, adverse economic conditions in Korea, as well as aggressive marketing and intense competition among banks to lend to this segment, have led to a deterioration in the asset quality of our loans to this segment in the past and such factors may lead to a deterioration of asset quality in the future. Any such deterioration would result in increased charge-offs and higher provisioning and reduced interest and fee income from this segment, which would have an adverse impact on our financial condition and results of operations. In addition, many small- and medium-sized enterprises have close business relationships with large corporations in Korea, primarily as suppliers. Any difficulties encountered by those large corporations would likely hurt the liquidity and financial condition of related small- and medium-sized enterprises, including those to which we have exposure, also resulting in an impairment of their ability to repay loans. Recently, some Korean large corporations have expanded into China and other countries with lower labor costs and other expenses through relocating their production plants and facilities to such countries, which may have a material adverse impact on such small- and medium-sized enterprises.

 

We have exposure to the largest Korean commercial conglomerates, known as “chaebols,” and, as a result, recent and any future financial difficulties of chaebols may have an adverse impact on us.

 

Of our 20 largest corporate exposures (including loans, debt and equity securities, credit-related commitments and other exposures) as of December 31, 2007, eleven were to companies that were members of the 30 largest chaebols in Korea. As of that date, the total amount of our exposures to the 30 largest chaebols was (Won)30,777 billion, or 13.8% of our total exposures. If the credit quality of our exposures to chaebols declines, we could require additional loan loss provisions, which would hurt our results of operations and financial condition. See “Item 4B. Business Overview—Assets and Liabilities—Loan Portfolio—Exposure to Chaebols.”

 

The allowances we have established against these exposures may not be sufficient to cover all future losses arising from these exposures. In addition, in the case of companies that are in or in the future enter into workout, restructuring, reorganization or liquidation proceedings, our recoveries from those companies may be limited. We may, therefore, experience future losses with respect to these exposures.

 

A large portion of our exposure is concentrated in a relatively small number of large corporate borrowers, which increases the risk of our corporate credit portfolio.

 

As of December 31, 2007, our 20 largest exposures to corporate borrowers totaled (Won)30,763 billion, which represented 13.7% of our total exposures. As of that date, our single largest corporate exposure was to the Bank of Korea, to which we had outstanding credits in the form of debt securities of (Won)10,021 billion, representing 4.5% of our total exposures. Aside from exposure to the Bank of Korea and other government-related agencies, our next largest exposure was to Industrial Bank of Korea, to which we had outstanding exposure of (Won)2,334 billion representing 1.0% of our total exposures. Any deterioration in the financial condition of our large

 

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corporate borrowers may require us to take substantial additional provisions and may have a material adverse impact on our results of operations and financial condition.

 

We have exposure to companies that are currently or may in the future be put in restructuring, and we may suffer losses as a result of additional loan loss provisions required or the adoption of restructuring plans with which we do not agree.

 

As of December 31, 2007, our credit exposures to companies that were in workout, corporate restructuring, composition or corporate reorganization amounted to (Won)406 billion or 0.2% of our total credit exposures, of which (Won)235 billion or 57.9% was classified as substandard or below and all of which was classified as impaired. As of the same date, our allowances for loan losses on these credit exposures amounted to (Won)136 billion, or 33.4% of these exposures. These allowances may not be sufficient to cover all future losses arising from our credit exposure to these companies. Furthermore, we have other exposure to such companies, in the form of debt and equity securities of such companies held by us (including equity securities we acquired as a result of debt-to-equity conversions). Including such securities, our exposures as of December 31, 2007 to companies in workout, restructuring, corporate reorganization or composition amounted to (Won)557 billion, or 0.3% of our total exposures.

 

Risks relating to our consumer credit portfolio

 

We may experience increases in delinquencies in our consumer loan and credit card portfolios.

 

In recent years, consumer debt has increased rapidly in Korea. Our portfolio of consumer loans has grown from (Won)32,302 billion as of December 31, 2004 to (Won)59,523 billion as of December 31, 2007. While our credit card portfolio decreased from (Won)2,128 billion as of December 31, 2004 to (Won)2,092 billion as of December 31, 2005 as a result of increased charge-offs and our efforts to reduce our credit card exposure, it increased to (Won)2,405 billion as of December 31, 2006 and increased further to (Won)3,325 billion as of December 31, 2007. As of December 31, 2007, our consumer loans and credit card receivables represented 37.2% and 2.1% of our total lending, respectively.

 

The rapid growth in our consumer loan portfolio in recent years may lead to increasing delinquencies and a deterioration in asset quality. Our consumer loans classified as substandard or below decreased from (Won)498 billion, or 1.5% of our consumer loan portfolio, as of December 31, 2004 to (Won)241 billion, or 0.4% of our consumer loan portfolio, as of December 31, 2007. We charged off consumer loans amounting to (Won)186 billion in 2007, as compared to (Won)74 billion in 2006, and recorded provisions in respect of consumer loans of (Won)133 billion in 2007, as compared to (Won)109 billion in 2006. Within our consumer loan portfolio, the outstanding balance of general purpose household loans, which, unlike mortgage or home equity loans, are often unsecured and therefore tend to carry a higher credit risk, has increased from (Won)14,175 billion, or 43.9% of our total outstanding consumer loans, as of December 31, 2004 to (Won)30,967 billion, or 52.0% of our total outstanding consumer loans, as of December 31, 2007.

 

In our credit card segment, outstanding balances overdue by 30 days or more decreased from (Won)136 billion, or 6.4% of our credit card receivables, as of December 31, 2004 to (Won)71 billion, or 2.1% of our credit card receivables, as of December 31, 2007. In line with industry practice, we have restructured a portion of our delinquent credit card account balances as loans. As of December 31, 2007, these restructured loans amounted to (Won)9 billion, or 0.3% of our credit card balances. Because these restructured loans are not initially recorded as being delinquent, our delinquency ratios do not fully reflect all delinquent amounts relating to our credit card balances. Including all restructured loans, outstanding balances overdue by 30 days or more accounted for 2.4% of our credit card balances as of December 31, 2007. We charged off credit card balances amounting to (Won)83 billion in 2007, as compared to (Won)87 billion in 2006, and recorded provisions in respect of credit card balances of (Won)24 billion in 2007, as compared to a reversal of provisions of (Won)5 billion in 2006. Delinquencies may increase in the future as a result of, among other things, adverse economic developments in Korea, difficulties

 

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experienced by other credit card issuers that adversely affect our customers, additional government regulation or the inability of Korean consumers to manage increased household debt.

 

A deterioration of the asset quality of our consumer loan and credit card portfolios would require us to increase our loan loss provisions and charge-offs and will adversely affect our financial condition and results of operations. In addition, our large exposure to consumer debt means that we are exposed to changes in economic conditions affecting Korean consumers. Accordingly, economic difficulties in Korea that hurt those consumers could result in further deterioration in the credit quality of our consumer loan and credit card portfolios. For example, a rise in unemployment or an increase in interest rates in Korea could adversely affect the ability of consumers to make payments and increase the likelihood of potential defaults.

 

A decline in the value of the collateral securing our consumer loans and our inability to realize full collateral value may adversely affect our consumer credit portfolio.

 

A substantial portion of our consumer loans is secured by real estate, the values of which have fluctuated significantly in recent years. Although it is our general policy to lend up to 60% of the appraised value of collateral (except in areas of high speculation designated by the government where we are required to limit our lending to 40% of the appraised value of collateral) and to periodically re-appraise our collateral, downturns in the real estate markets in Korea from time to time have resulted in declines in the value of the collateral securing some loans to levels below their outstanding principal balance. Future declines in real estate prices would reduce the value of the collateral securing our mortgage and home equity loans. If collateral values decline in the future, they may not be sufficient to cover uncollectible amounts in respect of our secured loans. Any declines in the value of the real estate or other collateral securing our consumer loans, or our inability to obtain additional collateral in the event of such declines, could result in a deterioration in our asset quality and may require us to take additional loan loss provisions.

 

In Korea, foreclosure on collateral generally requires a written petition to a court. An application, when made, may be subject to delays and administrative requirements that may decrease the value of such collateral. We cannot guarantee that we will be able to realize the full value on our collateral as a result of, among other factors, delays in foreclosure proceedings and defects in the perfection of our security interest in collateral. Our failure to recover the expected value of collateral could expose us to potential losses.

 

Risks relating to our financial holding company structure and strategy

 

Woori Finance Holdings has a limited operating history as a financial holding company, and our continued success cannot be assured.

 

Woori Finance Holdings was established in March 2001 by the KDIC as a financial holding company to consolidate the Korean government’s interests in four commercial banks (Hanvit Bank, Kyongnam Bank, Kwangju Bank and Peace Bank of Korea), one merchant bank and a number of other financial institutions. Each of these financial institutions was experiencing significant financial difficulties, including a sharp deterioration in asset quality and capital adequacy ratios and a net capital deficit, as a result of the Korean financial crisis that began in 1997, and had been recapitalized by the Korean government using public funds injected through the KDIC. Since that time, we have reorganized some of those business operations, and we may decide to implement other transfers or reorganizations with respect to our subsidiaries’ business operations in the future. While we believe that we have generally succeeded in improving our overall financial condition and normalizing our operations, we have a limited operating history as a financial holding company, particularly under our current structure and organization, and may experience difficulties in managing a larger and more diverse business. Accordingly, our continued success cannot be assured.

 

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We may not succeed in implementing our current strategy to take advantage of our integrated financial holding company structure.

 

Our success under a financial holding company structure depends on our ability to take advantage of our large existing base of retail and corporate banking customers and to implement a strategy of developing and cross-selling diverse financial products and services to them. As part of this strategy, we have standardized our subsidiaries’ risk management operations (except with respect to operational risk), including with respect to credit risk management following systems upgrades completed in 2007. We also plan to continue to diversify our product offerings through, among other things, increased marketing of insurance products and expansion of our investment banking and investment trust operations. The continued implementation of these plans may require additional investments of capital, infrastructure, human resources and management attention. This strategy entails certain risks, including the possibility that:

 

   

we may fail to successfully integrate our diverse systems and operations;

 

   

we may lack required capital resources;

 

   

we may fail to attract, develop and retain personnel with necessary expertise;

 

   

we may face competition from other financial holding companies and more specialized financial institutions in particular segments; and

 

   

we may fail to leverage our financial holding company structure to realize operational efficiencies and to cross-sell multiple products and services.

 

If our strategy does not succeed, we may incur losses on our investments and our results of operations and financial condition may suffer.

 

We may fail to realize the anticipated benefits relating to our reorganization and integration plan and any future acquisitions that we make.

 

Our success under a financial holding company structure depends on our ability to implement our reorganization and integration plan and to realize the anticipated synergies, growth opportunities and cost savings from coordinating and, in certain cases, combining the businesses of our various subsidiaries. As part of this plan, between December 2001 and February 2002 we merged the commercial banking business of Peace Bank of Korea into Woori Bank, converted Peace Bank of Korea into a credit card subsidiary, Woori Credit Card, and transferred the credit card business of Woori Bank to Woori Credit Card. We also transferred the credit card business of Kwangju Bank to Woori Credit Card in March 2003. In light of the deteriorating business performance of Woori Investment Bank and with the objective of restructuring the group platform, we merged Woori Investment Bank with Woori Bank in August 2003. In March 2004, in response to the liquidity problems of Woori Credit Card stemming from the deteriorating asset quality of its credit card portfolio, we merged Woori Credit Card with Woori Bank. Although we currently intend for our commercial banking subsidiaries to continue to operate as separate legal entities within our financial holding company structure and to maintain separate loan origination and other functions, we have standardized our subsidiaries’ risk management operations (except with respect to operational risk), including with respect to credit risk management following systems upgrades completed in 2007. In October and December 2004, we also acquired a 27.3% voting interest in LGIS, a leading domestic securities firm. In March 2005, we merged Woori Securities into LGIS and renamed the surviving entity Woori Investment & Securities, which became an equity method investee. See “Item 4B. Business Overview—Business—Capital Markets Activities—Securities Brokerage.” In May 2005, we purchased a 90.0% direct ownership interest in LG Investment Trust Management, or LGITM, from LGIS. We subsequently merged Woori Investment Trust Management, our wholly-owned asset management subsidiary, into LGITM and renamed the surviving entity Woori Asset Management, which remains a consolidated subsidiary. In July and September 2005, Woori Asset Management reacquired the remaining 10.0% interest from its minority shareholders. In May 2006, we transferred 30.0% of our interest in Woori Asset Management to Credit Suisse. Following this transfer, we renamed the entity Woori Credit Suisse Asset Management. As part of our business

 

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plan, we have, through Woori Bank, Kyongnam Bank and Kwangju Bank, also entered into bancassurance marketing arrangements with third party insurance companies. See “Item 4B. Business Overview—Business—Other Businesses—Bancassurance.” Furthermore, we acquired a 51.4% interest in Hanmi Capital in September 2007, which was subsequently renamed Woori Financial, and acquired a 51.0% interest in LIG Life Insurance in April 2008, which was subsequently renamed Woori Aviva Life Insurance. Woori Financial became a consolidated subsidiary, while we expect to account for Woori Aviva Life Insurance as an equity method investee under U.S. GAAP.

 

Although we have been integrating certain aspects of our subsidiaries’ operations in our financial holding company structure, they will generally continue to operate as independent entities with separate management and staff. Further integration of our subsidiaries’ separate businesses and operations, as well as those of any companies we may acquire in the future, could require a significant amount of time, financial resources and management attention. Moreover, that process could disrupt our operations (including our risk management operations) or information technology systems, reduce employee morale, produce unintended inconsistencies in our standards, controls, procedures or policies, and affect our relationships with customers and our ability to retain key personnel. The continued implementation of our reorganization and integration plan, as well as any future additional integration plans that we may adopt in connection with our acquisitions or otherwise, and the realization of the anticipated benefits of our financial holding company structure may be blocked, delayed or reduced as a result of many factors, some of which may be outside our control. These factors include:

 

   

difficulties in integrating the diverse activities and operations of our subsidiaries or any companies we may acquire, including risk management operations and information technology systems, personnel, policies and procedures;

 

   

difficulties in reorganizing or reducing overlapping personnel, branches, networks and administrative functions;

 

   

restrictions under the Financial Holding Company Act and other regulations on transactions between our company and, or among, our subsidiaries;

 

   

unexpected business disruptions;

 

   

loss of customers; and

 

   

labor unrest.

 

Accordingly, we may not be able to realize the anticipated benefits of our current or any future reorganization and integration plan and any future acquisitions that we make, and our business, results of operations and financial condition may suffer as a result.

 

We may not generate sufficient additional fees to achieve our revenue diversification strategy.

 

An important element of our overall strategy is increasing our fee income in order to diversify our revenue base, in anticipation of greater competition and declining lending margins. Historically, our primary source of revenues has been net interest income from our banking operations. To date, except for credit card, trust management, bancassurance, brokerage and currency transfer fees (including foreign exchange-related commissions) and fees collected in connection with the operation of our investment funds, we have not generated substantial fee income. We intend to develop new sources of fee income as part of our business strategy, including through our investment banking and asset management businesses. Although we, like many other Korean financial institutions, have begun to charge fees to our customers more regularly, customers may prove unwilling to pay additional fees, even in exchange for more attractive value-added services, and their reluctance to do so would adversely affect the implementation of this aspect of our strategy.

 

In 2007, our subsidiary Woori Bank reduced or waived many of the fees it charges on its banking services, in response to customer demand and to similar measures taken by other commercial banks in Korea. Specifically,

 

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Woori Bank reduced or waived its fees on fund transfers through its ATMs, and exempted its fees on fund transfers through its mobile banking services. Woori Bank also waived the fees it charges on the opening of household checking accounts and on the issuance of bankers’ checks and certain tax-related statements. In addition, in March 2008, we began a stockholder benefits program whereby Woori Bank will reduce or waive various fees, including foreign exchange-related commissions and credit card annual membership fees, for holders of ten shares or more of our common stock. These measures may adversely affect our fee income.

 

We depend on limited forms of funding to fund our operations at the holding company level.

 

We are a financial holding company with no significant assets other than the shares of our subsidiaries. Our primary sources of funding and liquidity are dividends from our subsidiaries, direct borrowings and issuances of equity or debt securities at the holding company level. In addition, as a financial holding company, we are required to meet certain minimum financial ratios under Korean law, including with respect to liquidity, leverage and capital adequacy. Our ability to meet our obligations to our direct creditors and employees and our other liquidity needs and regulatory requirements at the holding company level depends on timely and adequate distributions from our subsidiaries and our ability to sell our securities or obtain credit from our lenders.

 

In the case of dividend distributions, this depends on the financial condition and operating results of our subsidiaries. In the future, our subsidiaries may enter into agreements, such as credit agreements with lenders or indentures relating to high-yield or subordinated debt instruments, that impose restrictions on their ability to make distributions to us, and the terms of future obligations and the operation of Korean law could prevent our subsidiaries from making sufficient distributions to us to allow us to make payments on our outstanding obligations. See “—As a holding company, we depend on receiving dividends from our subsidiaries to pay dividends on our common stock.” Any delay in receipt of or shortfall in payments to us from our subsidiaries could result in our inability to meet our liquidity needs and regulatory requirements, including minimum liquidity, double leverage and capital adequacy ratios, and may disrupt our operations at the holding company level.

 

In addition, creditors of our subsidiaries will generally have claims that are prior to any claims of our creditors with respect to their assets. Furthermore, our inability to sell our securities or obtain funds from our lenders on favorable terms, or at all, could also result in our inability to meet our liquidity needs and regulatory requirements and may disrupt our operations at the holding company level.

 

As a holding company, we depend on receiving dividends from our subsidiaries to pay dividends on our common stock.

 

Since our principal assets at the holding company level are the shares of our subsidiaries, our ability to pay dividends on our common stock largely depends on dividend payments from those subsidiaries. Those dividend payments are subject to the Korean Commercial Code, the Bank Act and regulatory limitations, generally based on capital levels and retained earnings, imposed by the various regulatory agencies with authority over those entities. The ability of our banking subsidiaries to pay dividends is subject to regulatory restrictions to the extent that paying dividends would impair each of their nonconsolidated profitability, financial condition or other cash flow needs. For example:

 

   

under the Korean Commercial Code, dividends may only be paid out of distributable income, an amount which is calculated by subtracting the aggregate amount of a company’s paid-in capital and certain mandatory legal reserves from its net assets, in each case as of the end of the prior fiscal period;

 

   

under the Bank Act, a bank also must credit at least 10% of its net profit to a legal reserve each time it pays dividends on distributable income until that reserve equals the amount of its total paid-in capital; and

 

   

under the Bank Act and the requirements of the Financial Services Commission, if a bank fails to meet its required capital adequacy ratio or otherwise subject to the management improvement measures imposed by the Financial Services Commission, then the Financial Services Commission may restrict the declaration and payment of dividends by that bank.

 

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Our subsidiaries may not continue to meet the applicable legal and regulatory requirements for the payment of dividends in the future. If they fail to do so, they may stop paying or reduce the amount of the dividends they pay to us, which would have an adverse effect on our ability to pay dividends on our common stock.

 

In addition, we and our subsidiaries may not be able to pay dividends to the extent that such payments would result in a failure to meet any of the applicable financial targets under our respective memoranda of understanding with the KDIC. See “—Other risks relating to our business—Our failure to meet the financial and other business targets set forth in current terms of the memoranda of understanding among us, our subsidiaries and the KDIC may result in substantial harm to us or our subsidiaries.”

 

Risks relating to competition

 

Competition in the Korean financial industry is intense, and we may lose market share and experience declining margins as a result.

 

Competition in the Korean financial market has been and is likely to remain intense. Some of the financial institutions that we compete with are larger in terms of asset size and customer base and have greater financial resources or more specialized capabilities than our subsidiaries. In addition, in the area of our core banking operations, most Korean banks have been focusing on retail customers and small- and medium-sized enterprises in recent years, although they are beginning to increase their exposure to large corporate borrowers, and have been focusing on developing fee income businesses, including bancassurance and investment products, as increasingly important sources of revenue. In the area of credit cards, Korean banks and credit card companies have in the past engaged in aggressive marketing activities and made significant investments, contributing to some extent to lower profitability and asset quality problems previously experienced with respect to credit card receivables. The competition and market saturation resulting from this common focus may make it more difficult for us to secure retail and small- and medium-sized customers with the credit quality and on credit terms necessary to maintain or increase our income and profitability.

 

In addition, we believe that regulatory reforms, including the enactment of the Financial Investment Services and Capital Market Act in 2007, and the general modernization of business practices in Korea will lead to increased competition among financial institutions in Korea. We also believe that foreign financial institutions, many of which have greater experience and resources than we do, will seek to compete with us in providing financial products and services either by themselves or in partnership with existing Korean financial institutions. Furthermore, a number of significant mergers and acquisitions in the industry have taken place in Korea over the last few years, including the acquisition of Koram Bank by an affiliate of Citibank in 2004, the acquisition of Korea First Bank by Standard Chartered Bank in April 2005 and Chohung Bank’s merger with Shinhan Bank in April 2006, as well as the proposed acquisition of Korea Exchange Bank by HSBC. We expect that consolidation in the financial industry will continue. Some of the financial institutions resulting from this consolidation may, by virtue of their increased size and business scope, provide greater competition for us. Increased competition and continuing consolidation may lead to decreased margins, resulting in a material adverse impact on our future profitability. Accordingly our results of operations and financial condition may suffer as a result of increasing competition in the Korean financial industry.

 

Competition for customer deposits may increase, resulting in a loss of our deposit customers or an increase in our funding costs.

 

In recent years, we have faced increasing pricing pressure on deposit products from our competitors. If we do not continue to offer competitive interest rates to our deposit customers, we may lose their business. In addition, even if we are able to match our competitors’ pricing, doing so may result in an increase in our funding costs, which may have an adverse impact on our results of operations.

 

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Other risks relating to our business

 

Difficult conditions in the global credit and financial markets could adversely affect our liquidity and performance.

 

During the second and third quarter of 2007, credit markets in the United States started to experience difficult conditions and volatility that in turn have affected worldwide financial markets. In particular, in late July and early August 2007, market uncertainty in the U.S. sub-prime mortgage sector increased dramatically and further expanded to other markets such as those for leveraged finance, collateralized debt obligations and other structured products. These conditions have resulted in reduced liquidity, greater volatility, widening of credit spreads and a lack of price transparency in the United States and global credit and financial markets. We are exposed to adverse developments in the U.S. sub-prime mortgage market through our holdings of collateralized debt obligations related to U.S. mortgage loans. As of December 31, 2007, we held, through Woori Bank, approximately (Won)980 billion in face value of collateralized debt obligations, of which approximately (Won)460 billion were related to U.S. sub-prime mortgages. We recognized impairment losses of (Won)417 billion in 2007 with respect to our holdings of U.S. sub-prime mortgage-related collateralized debt obligations as well as impairment losses of (Won)89 billion with respect to other collateralized debt obligations, which in turn resulted in a decrease in net gain on investment securities and contributed to a decrease in our non-interest income in 2007 as compared to 2006. We are also exposed to adverse developments in the U.S. and global credit markets through our holdings of derivatives. As of December 31, 2007, our total exposure under credit derivatives outstanding was approximately (Won)615 billion (including (Won)146 billion of credit derivatives relating to Korean companies), principally through credit default swaps and total return swaps held by Woori Bank. We recognized losses on valuation of our credit derivatives amounting to (Won)130 billion in 2007, which in turn resulted in a decrease in our net trading revenue and contributed to a decrease in our non-interest income in 2007 as compared to 2006. Furthermore, in the first quarter of 2008, the fair value of our holdings of collateralized debt obligations and credit derivatives declined further following the downgrades of ratings of such instruments by various rating agencies. For the three months ended March 31, 2008, on a Korean GAAP basis, we recognized a decrease in the fair value of our holdings of collateralized debt obligations of approximately (Won)93 billion and losses on valuation of our credit derivatives of approximately (Won)44 billion. Continued adverse conditions in the U.S. sub-prime mortgage and U.S. and global credit markets could result in additional losses on collateralized debt obligations as well as credit derivatives held by us.

 

In addition, recent increases in credit spreads, as well as limitations on the availability of credit, may affect our ability to borrow, which may adversely affect our liquidity and performance. In the event that the current difficult conditions in the global credit markets continue, we may be forced to fund our operations at a higher cost or we may be unable to raise as much funding as we need to support our lending and other activities. This could cause us to curtail our business activities and could increase our cost of funding, both of which may reduce our profitability.

 

Our failure to meet the financial and other business targets set forth in current terms of the memoranda of understanding among us, our subsidiaries and the KDIC may result in substantial harm to us or our subsidiaries.

 

Under the current terms of the memoranda of understanding entered into among us, Woori Bank, Kyongnam Bank, Kwangju Bank and the KDIC, we and our subsidiaries are required to meet certain financial and business targets on a semi-annual and/or quarterly basis until the end of 2008. See “Item 4A. History and Development of the Company—History—Relationship with the Korean Government.” Due to its merger with Woori Credit Card, Woori Bank failed to meet its return on assets target and operating profit per employee target as of June 30, 2004. We also failed to meet three of the financial targets as of June 30, 2004, which were return on total assets, expense to revenue ratio, and operating income per employee. The KDIC notified us that we could not improve fringe benefits for our employees (including salaries), and ordered us to devise and report to the KDIC a plan to meet those three financial targets. We negotiated with the KDIC to adjust some of the financial targets applicable to us and our subsidiaries under our memoranda of understanding and, as a result, each of us, Woori Bank, Kyongnam Bank and Kwangju Bank have met all of our financial targets subsequent to such adjustments.

 

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If we or our subsidiaries fail to satisfy our obligations under the current or any new memoranda of understanding in the future, the Korean government, through the KDIC, may impose penalties on us or our subsidiaries. These penalties could include the replacement of our senior management, sale of our assets, restructuring of our organization, restrictions on our business, including a suspension or transfer of our business, and elimination or reduction of existing equity. Accordingly, our failure to meet the obligations in the memoranda of understanding may result in harm to our business, financial condition and results of operations.

 

We have provided certain assets as collateral in connection with our secured borrowings and could be required to make payments and realize losses in the future relating to those assets.

 

We have provided certain assets as collateral for our secured borrowings in recent years. These secured borrowings often take the form of asset securitization transactions, where we nominally sell our assets to a securitization vehicle that issues securities backed by those assets, although the assets remain on our balance sheet. These secured borrowings are intended to be fully repaid through recoveries on collateral. Some of these nominal asset sales were with recourse, which means that if delinquencies arise with respect to such assets, we will be required to either repay a proportionate amount of the related secured borrowing (by reversing the nominal sale and repurchasing such assets) or compensate the securitization vehicle for any net shortfalls in its recoveries on such assets. As of December 31, 2007, the aggregate amount of assets we had provided as collateral for our secured borrowings was (Won)4,573 billion. As of that date, we had established allowances of (Won)1 billion in respect of possible losses on those assets. If we are required to make payments on such assets, or to repay our secured borrowings on those assets and are unable to make sufficient recoveries on them, we may realize further losses on these assets to the extent those payments or recovery shortfalls exceed our allowances.

 

An increase in interest rates would decrease the value of our debt securities portfolio and raise our funding costs while reducing loan demand and the repayment ability of our borrowers, which could adversely affect us.

 

From 2000 to 2004, interest rates in Korea declined to historically low levels as the government sought to stimulate economic growth through active rate-lowering measures. Interest rates began to rebound in the second half of 2005 and stabilized in 2006 and 2007, although they have declined again in 2008. Approximately 91.8% of the debt securities our banking subsidiaries hold pay interest at a fixed rate. All else being equal, an increase in interest rates would lead to a decline in the value of traded debt securities. A sustained increase in interest rates will also raise our funding costs, while reducing loan demand, especially among consumers. Rising interest rates may therefore require us to re-balance our assets and liabilities in order to minimize the risk of potential mismatches and maintain our profitability. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk.” In addition, rising interest rate levels may adversely affect the Korean economy and the financial condition of our corporate and consumer borrowers, including holders of our credit cards, which in turn may lead to a deterioration in our credit portfolio. In particular, since most of our consumer and corporate loans bear interest at rates that adjust periodically based on prevailing market rates, a sustained increase in interest rate levels will increase the interest costs of our consumer and corporate borrowers and will adversely affect their ability to make payments on their outstanding loans.

 

Our funding is highly dependent on short-term deposits, which dependence may adversely affect our operations.

 

Our banking subsidiaries meet a significant amount of their funding requirements through short-term funding sources, which consist primarily of customer deposits. As of December 31, 2007, approximately 93.6% of these deposits had maturities of one year or less or were payable on demand. In the past, a substantial proportion of these customer deposits have been rolled over upon maturity. We cannot guarantee, however, that depositors will continue to roll over their deposits in the future. In the event that a substantial number of these short-term deposit customers withdraw their funds or fail to roll over their deposits as higher-yielding investment

 

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opportunities emerge, our liquidity position could be adversely affected. Our banking subsidiaries may also be required to seek more expensive sources of short-term and long-term funding to finance their operations. See “Item 5B. Liquidity and Capital Resources—Financial Condition—Capital Adequacy.”

 

Labor union unrest may disrupt our operations and hinder our ability to continue to reorganize and integrate our operations.

 

Most financial institutions in Korea, including our subsidiaries, have experienced periods of labor unrest. As part of our reorganization and integration plan, we have transferred or merged some of the businesses operations of our subsidiaries into one or more entities and implemented other forms of corporate and operational restructuring. We may decide to implement other organizational or operational changes, as well as acquisitions or dispositions, in the future. Such efforts have in the past been met with significant opposition from labor unions in Korea. For example, in June 2003, members of Chohung Bank’s labor union went on strike to express their opposition to the proposed sale by the KDIC of its interest in that bank to Shinhan Financial Group. Furthermore, in July 2004, members of Koram Bank’s labor union engaged in a strike to obtain concessions in connection with the acquisition of Koram Bank by an affiliate of Citibank. Although we did not experience any major labor disputes in connection with the merger of Woori Credit Card with Woori Bank, our employees at Woori Securities staged a one-month strike to protest the merger of Woori Securities into LGIS in March 2005. Actual or threatened labor disputes may in the future disrupt the reorganization and integration process and our business operations, which in turn may hurt our financial condition and results of operations.

 

The secondary market for corporate bonds in Korea is not fully developed, and, as a result, we may not be able to realize the full “marked-to-market” value of debt securities we hold when we sell any of those securities.

 

As of December 31, 2007, our banking subsidiaries held debt securities issued by Korean companies and financial institutions (other than those issued by government-owned or -controlled enterprises or financial institutions, which include the KDIC, the Korea Electric Power Corporation, the Bank of Korea, the Korea Development Bank and the Industrial Bank of Korea) with a total book value of (Won)17,912 billion in our trading and investment securities portfolio. The market value of these securities could decline significantly due to various factors, including future increases in interest rates or a deterioration in the financial and economic condition of any particular issuer or of Korea in general. Any of these factors individually or a combination of these factors would require us to write down the fair value of these debt securities, resulting in impairment losses. Because the secondary market for corporate bonds in Korea is not fully developed, the market value of many of these securities as reflected on our consolidated balance sheet is determined by references to suggested prices posted by Korean rating agencies or the Korea Securities Dealers Association. These valuations, however, may differ significantly from the actual value that we could realize in the event we elect to sell these securities. As a result, we may not be able to realize the full “marked-to-market” value at the time of any such sale of these securities and thus may incur additional losses.

 

We and our commercial banking subsidiaries may be required to raise additional capital to maintain our capital adequacy ratio or for other reasons, which we or they may not be able to do on favorable terms or at all.

 

Under the new capital adequacy requirements of the Financial Services Commission which came into effect on January 1, 2007, we, as a bank holding company, are required to maintain a minimum consolidated capital adequacy ratio, which is the ratio of equity capital as a percentage of risk-weighted assets on a consolidated Korean GAAP basis, of 8.0%. See “Item 4B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Capital Adequacy” and “Item 5B. Liquidity and Capital Resources—Financial Condition—Capital Adequacy.” In addition, each of our commercial banking subsidiaries is required to maintain a minimum combined Tier I and Tier II capital adequacy ratio of 8.0%, on a consolidated Korean GAAP basis. In both cases, Tier II capital is included in calculating the combined Tier I and Tier II capital adequacy ratio up to 100% of Tier I capital. In addition, the memoranda of understanding among

 

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us, our subsidiaries and the KDIC require us and our subsidiaries to meet specified capital adequacy ratio requirements. See “Item 4A. History and Development of the Company—History—Relationship with the Korean Government.” As of December 31, 2007, our capital ratio and the capital adequacy ratios of our subsidiaries exceeded the minimum levels required by both the Financial Services Commission and these memoranda. However, our capital base and capital adequacy ratio or those of our subsidiaries may deteriorate in the future if our or their results of operations or financial condition deteriorates for any reason, or if we or they are not able to deploy their funding into suitably low-risk assets. To the extent that our subsidiaries fail to maintain their capital adequacy ratios in the future, Korean regulatory authorities may impose penalties on them ranging from a warning to suspension or revocation of their licenses.

 

If our capital adequacy ratio or those of our subsidiaries deteriorate, we or they may be required to obtain additional Tier I or Tier II capital in order to remain in compliance with the applicable capital adequacy requirements. As the financial holding company for our subsidiaries, we may be required to raise additional capital to contribute to our subsidiaries. We or our subsidiaries may not be able to obtain additional capital on favorable terms, or at all. The ability of our company and our subsidiaries to obtain additional capital at any time may be constrained to the extent that banks or other financial institutions in Korea or from other Asian countries are seeking to raise capital at the same time. Depending on whether we or our subsidiaries are obtaining any necessary additional capital, and the terms and amount of any additional capital obtained, holders of our common stock or American depositary shares, or ADSs, may experience a dilution of their interest, or we may experience a dilution of our interest in our subsidiaries.

 

We may face increased capital requirements under the new Basel Capital Accord.

 

Beginning on January 1, 2008, the Financial Supervisory Service implemented the new Basel Capital Accord, referred to as Basel II, in Korea, which has affected the way risk is measured among Korean financial institutions, including our commercial banking subsidiaries. Building upon the initial Basel Capital Accord of 1988, which focused primarily on capital adequacy and asset soundness as a measure of risk, Basel II expands this approach to contemplate additional areas of risk such as operational risk. Basel II also institutes new measures that require our commercial banking subsidiaries to take into account individual borrower credit risk and operational risk when calculating risk-weighted assets.

 

In addition, under Basel II, banks are permitted to follow either a standardized approach or an internal ratings-based approach with respect to calculating capital requirements. Woori Bank is currently using a standardized approach but has voluntarily chosen to establish and follow an internal ratings-based approach, which is more stringent in terms of calculating risk sensitivity with respect to its capital requirements and is expected to be implemented in 2009. Kyongnam Bank and Kwangju Bank have chosen to use a standardized approach. While we believe that Woori Bank’s implementation of an internal ratings-based approach for the first time in 2009 will not lead to a significant increase in its capital requirements, there can be no assurance that such internal ratings-based approach under Basel II will not require an increase in Woori Bank’s credit risk capital requirements in the future, which may require it to either improve its asset quality or raise additional capital. See “Item 5A. Operating Results—Overview—New Basel Capital Accord” and “Item 5B. Liquidity and Capital Resources—Financial Condition—Capital Adequacy.”

 

Our Internet banking services are subject to security concerns relating to the commercial use of the Internet.

 

We provide Internet banking services to our retail and corporate customers, which require sensitive customer information, including passwords and account information, to be transferred over a secure connection on the Internet. However, connections on the Internet, although secure, are not free from security breaches. We may experience security breaches in connection with our Internet banking service in the future, which may result in liability to our customers and third parties and materially and adversely affect our business.

 

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We may experience disruptions, delays and other difficulties from our information technology systems.

 

We rely on our information technology systems for our daily operations including billing, effecting online and offline banking transactions and record keeping. We may experience disruptions, delays or other difficulties from our information technology systems, which may have an adverse effect on our business and adversely impact our customers’ confidence in us.

 

We do not publish interim financial information on a U.S. GAAP basis.

 

Neither we nor our subsidiaries publish interim financial information on a U.S. GAAP basis. U.S. GAAP differs in significant respects from Korean GAAP, particularly with respect to the establishment of loan loss allowances and provisions. See “Item 5B. Financial Condition—Selected Financial Information Under Korean GAAP” and “—Reconciliation with Korean GAAP.” As a result, our allowance and provision levels, as well as certain other balance sheet and income statement items, reflected in our interim financial statements under Korean GAAP may differ substantially from those required to be reflected under U.S. GAAP.

 

We are generally subject to Korean corporate governance and disclosure standards, which differ in significant respects from those in other countries.

 

Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies which differ in many respects from standards applicable in other countries, including the United States. As a reporting company registered with the U.S. Securities and Exchange Commission and listed on the New York Stock Exchange, we are subject to certain corporate governance standards as mandated by the Sarbanes-Oxley Act of 2002. However, foreign private issuers, including us, are exempt from certain corporate governance requirements under the Sarbanes-Oxley Act or under the rules of the New York Stock Exchange. There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public or non-public companies in other countries. Such differences in corporate governance standards and less public information could result in less than satisfactory corporate governance practices or disclosure to investors in certain countries.

 

Risks relating to government control

 

The KDIC, which is our controlling stockholder, is controlled by the Korean government and could cause us to take actions or pursue policy objectives that may be against your interests.

 

The Korean government, through the KDIC, currently owns 72.97% of our outstanding common stock. So long as the Korean government remains our controlling stockholder, it will have the ability to cause us to take actions or pursue policy objectives that may conflict with the interests of our other stockholders. For example, in order to further its public policy goals, the Korean government could request that we participate with respect to a takeover of a troubled financial institution or encourage us to provide financial support to particular entities or sectors. Such actions or others that are not consistent with maximizing our profits or the value of our common stock may have an adverse impact on our results of operations and financial condition and may cause the price of our common stock and ADSs to decline.

 

In addition, pursuant to the terms of our memorandum of understanding with the KDIC, we are required to take any necessary actions (including share buybacks and payment of dividends) to return to the KDIC the funds it injected into us and our subsidiaries, so long as those actions do not cause a material adverse effect on the normalization of our business operations as contemplated by the memorandum of understanding. Any actions that we take as a result of this requirement may favor the KDIC over our other stockholders and may therefore be against your interests.

 

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Risks relating to government regulation and policy

 

New loan loss provisioning guidelines implemented by the Financial Services Commission may require us to increase our provisioning levels under Korean GAAP, which could adversely affect us.

 

In recent years, the Financial Services Commission (formerly the Financial Supervisory Commission) has implemented changes to the loan loss provisioning requirements applicable to Korean banks, which have resulted in increases to our provisions and adversely impacted our reported results of operations and financial condition under Korean GAAP. Until 2004, the requirement to establish allowances for possible losses in respect of confirmed acceptances and guarantees under Korean GAAP applied only to those classified as substandard or below. Commencing in the second half of 2005, the requirement was extended to cover confirmed acceptances and guarantees classified as normal or precautionary, as well as unconfirmed acceptances and guarantees and bills endorsed. Similarly, until 2004, the requirement to establish other allowances in respect of unused credit lines under Korean GAAP applied only to the unused credit limit for cash advances on active credit card accounts, defined as those with a transaction recorded during the past year. Commencing in the second half of 2005, the requirement was extended to cover the unused credit limit for credit card purchases on active accounts, as well as the unused credit limit on consumer and corporate loans. Due to these changes, our consolidated allowance for acceptances and guarantees and other allowances under Korean GAAP increased by (Won)23 billion and (Won)134 billion, respectively, as of December 31, 2005, and our consolidated income before income tax under Korean GAAP for 2005 decreased by (Won)157 billion.

 

Furthermore, in the second half of 2006, the Financial Services Commission increased the minimum required provisioning levels applicable under Korean GAAP to loans, confirmed and unconfirmed acceptances and guarantees, bills endorsed and unused credit lines that are classified as normal and precautionary. The Financial Services Commission also extended the requirement to establish other allowances on unused credit lines under Korean GAAP to cover inactive credit card accounts. As a result of these changes, our consolidated allowance for loan losses, allowance for acceptances and guarantees and other allowances for unused lines of credit under Korean GAAP increased by (Won)283 billion, (Won)17 billion and (Won)125 billion, respectively, as of December 31, 2006, and our consolidated income before income tax under Korean GAAP for 2006 decreased by (Won)425 billion.

 

In addition, in the second half of 2007, the Financial Services Commission increased the minimum required provisioning levels applicable to all loans (other than consumer loans and credit card balances) classified as normal. This change resulted in a significant increase in our consolidated allowance for loan losses, allowance for acceptances and guarantees and other allowances for unused lines of credit under Korean GAAP, and a corresponding decrease in our consolidated income before income tax under Korean GAAP, in 2007.

 

Also, in November 2004, the Financial Services Commission announced that it will implement new loan loss provisioning guidelines, which Korean banks will be required to follow from the end of 2007 in preparing financial statements under Korean GAAP. These guidelines include a new requirement that banks take into account “expected losses” with respect to credits in establishing their allowance for loan losses, instead of establishing such allowances based on the classification of credits under the current asset classification criteria. Under the new guidelines, all Korean banks were required to establish systems to calculate their “expected losses” based on their historical losses during 2005. The Financial Services Commission also announced that Korean banks could voluntarily comply with the new loan loss provisioning guidelines commencing in 2005. Specifically, in the second half of 2005, banks that had implemented a credible internal system for evaluating “expected losses” could establish their allowance for loan losses under Korean GAAP based on their historical losses, so long as the total allowance for loan losses established exceeded the levels required under the asset classification-based provisioning guidelines. Similarly, in the first half of 2006, banks that had implemented a credible system for evaluating “expected losses” could establish their allowance for loan losses under Korean GAAP based on such expected losses, so long as the total allowance established exceeded required levels. We complied with the new guidelines and implemented a system for evaluating “expected losses” in establishing our allowance for loan losses, which did not in and of itself result in an increase in our provisions for loan losses

 

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under Korean GAAP in 2005 or 2006. However, the Financial Services Commission has not since released any further details regarding the new guidelines, and it is unclear whether such new guidelines will be implemented in the future. Full compliance with the new guidelines may increase our provisions for loan losses under Korean GAAP compared to previous levels established under the asset classification-based provisioning guidelines.

 

Any future required increases in our provisions for loan losses could have an adverse effect on our reported results of operations and financial condition under Korean GAAP and our reported capital adequacy ratio, which may adversely affect the market price of our common stock and ADSs.

 

Government regulation of consumer lending, particularly mortgage and home equity lending, has recently become more stringent, which may hurt our consumer banking operations.

 

In light of concerns regarding the potential risks of excessive consumer lending, particularly mortgage and home equity lending, the Korean government has in recent years adopted more stringent regulations with respect to consumer lending by Korean banks.

 

The Korean government has also expressed a continuing commitment to stabilize rising prices in the real estate market and a willingness to implement necessary measures for this purpose. For example, from 2004 through 2006, the Korean government:

 

   

raised the residential property tax applicable to residential properties in cases where the aggregate value of the residential properties held by a single household exceeds (Won)600 million;

 

   

raised the capital gains tax applicable to sales of residential properties in cases where such property belongs to a household that owns more than three, and under certain circumstances more than two, residential properties;

 

   

placed a ceiling on the sale price of newly constructed residential properties and, under certain circumstances, required developers to disclose the costs incurred in connection with the construction of such properties;

 

   

amended the Urban and Residential Environment Improvement Act to require that at least 25% of any increased floor space resulting from the redevelopment of existing residential properties be devoted to the construction of rental residential properties;

 

   

adopted more stringent guidelines that require financial institutions to impose debt-to-income limits on customers, in addition to loan-to-value ratio requirements, in connection with mortgage loans for real estate located in areas of wide-spread real property speculation or excessive investment;

 

   

issued unofficial guidance recommending that Korean banks further limit their mortgage and home equity lending; and

 

   

adopted new measures to increase the supply of residential properties, including long-term residential lease properties.

 

See “Item 4B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Banks—Recent Regulations Relating to Retail Household Loans.”

 

These regulations and measures, as well as any similar regulations that the Korean government may adopt in the future, may have the effect of constraining the growth and profitability of our consumer banking operations, especially in the area of mortgage and home equity lending. Furthermore, these regulations and measures may result in substantial future declines in real estate prices in Korea, which will reduce the value of the collateral securing our mortgage and home equity lending. See “—Other risks relating to our business—A decline in the value of the collateral securing our loans and our inability to realize full collateral value may adversely affect our credit portfolio.”

 

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Government regulation of the credit card business has increased significantly in recent years, which may hurt our credit card operations.

 

Due to the rapid growth of the credit card market and rising consumer debt levels in Korea in prior years, the Korean government heightened its regulatory oversight of the credit card industry. From mid-2002 through early 2003, the Ministry of Strategy and Finance (formerly the Ministry of Finance and Economy) and the Financial Services Commission adopted a variety of amendments to existing regulations governing the credit card industry. Among other things, these amendments increased minimum required provisioning levels applicable to credit card receivables, required the reduction in volumes for credit card loans, increased minimum capital ratios and allowed the imposition of new sanctions against credit card companies that failed to meet applicable requirements. The Financial Services Commission and the Financial Supervisory Service also implemented a number of changes to the rules governing the evaluation and reporting of credit card balances and delinquency ratios, as well as procedures governing which persons may receive credit cards. For more details relating to these regulations, see “Item 4B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Banks—Credit Card Business.”

 

The Korean government may adopt further regulatory changes in the future that affect the credit card industry. Depending on their nature, such changes may adversely affect our credit card operations, by restricting its growth or scope, subjecting it to stricter requirements and potential sanctions or greater competition, constraining its profitability or otherwise.

 

The Korean government may promote lending and financial support by the Korean financial industry to certain types of borrowers as a matter of policy, which financial institutions, including us, may decide to follow.

 

Through its policy guidelines and recommendations, the Korean government has promoted and, as a matter of policy, may continue to attempt to promote lending by the Korean financial industry to particular types of borrowers. For example, the Korean government has in the past announced policy guidelines requesting financial institutions to participate in remedial programs for troubled corporate borrowers, as well as policies aimed at promoting certain sectors of the economy, including measures such as making low interest funding available to financial institutions that lend to these sectors. The government has in this manner encouraged mortgage lending to low-income individuals and lending to small- and medium-sized enterprises. We expect that all loans or credits made pursuant to these government policies will be reviewed in accordance with our credit approval procedures. However, these or any future government policies may influence us to lend to certain sectors or in a manner in which we otherwise would not in the absence of that policy.

 

In the past, the Korean government has also issued recommendations encouraging financial institutions in Korea to provide financial support to particular economic sectors as a matter of policy. For example, in light of the financial market instability in Korea resulting from the liquidity problems faced by credit card companies during the first quarter of 2003, the Korean government announced temporary measures in April 2003 intended to provide liquidity support to credit card companies. These measures included, among other things, requesting banks and other financial institutions that held debt securities of credit card companies to extend the maturity of such securities and also requesting banks and other financial institutions to make contributions to mutual funds to enable them to purchase debt securities of credit card companies.

 

The Korean government may in the future request financial institutions in Korea, including us, to make investments in or provide other forms of financial support to particular sectors of the Korean economy as a matter of policy, which financial institutions, including us, may decide to accept. We may incur costs or losses as a result of providing such financial support.

 

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The Financial Services Commission may impose burdensome measures on us if it deems us or one of our subsidiaries to be financially unsound.

 

If the Financial Services Commission deems our financial condition or the financial condition of our subsidiaries to be unsound, or if we or our subsidiaries fail to meet applicable regulatory standards, such as minimum capital adequacy and liquidity ratios, the Financial Services Commission may order, among other things:

 

   

capital increases or reductions;

 

   

stock cancellations or consolidations;

 

   

transfers of business;

 

   

sales of assets;

 

   

closures of branch offices;

 

   

mergers with other financial institutions; and

 

   

suspensions of a part or all of our business operations.

 

If any of these measures are imposed on us by the Financial Services Commission, they could hurt our business, results of operations and financial condition. In addition, if the Financial Services Commission orders us to partially or completely reduce our capital, you may lose part or all of your investment.

 

The recent enactment of the Financial Investment Services and Capital Market Act may result in increased competition in the Korean financial services industry.

 

In July 2007, the National Assembly of Korea enacted the Financial Investment Services and Capital Market Act, a new law intended to enhance the integration of the Korean capital markets and financial investment products industry. When the Financial Investment Services and Capital Market Act becomes effective in February 2009, our subsidiary banks and other banks in Korea may face greater competition in the Korean financial services market from securities companies and other non-bank financial institutions. For example, securities companies currently are not permitted to accept deposits other than for purposes of securities investment by customers and may not provide secondary services in connection with securities investments such as settlement and remittance relating to such deposits. However, under the Financial Investment Services and Capital Market Act, financial investment companies, which will replace the current securities companies, among others, will be able to provide such secondary services. Accordingly, our subsidiary banks and other banks in Korea may experience a loss of customer deposits (which in turn may result in a need to seek alternative funding sources and an increase in our subsidiary banks’ funding costs), as well as a decrease in our subsidiary banks’ settlement and remittance service fee income, which may outweigh the benefits to our non-banking subsidiaries under the Financial Investment Services and Capital Market Act.

 

In addition, we believe it is likely that securities companies, as well as asset management companies and other financial industry participants in Korea, will seek to take advantage of the greater flexibility provided under the Financial Investment Services and Capital Market Act to expand their operations in areas that we also plan to develop further, such as investment banking and asset management. As a result, we may face increased competition for customers as well as qualified employees as a result of the implementation of the new law. The Financial Investment Services and Capital Market Act is also likely to result in substantial consolidation and convergence among companies in the Korean financial services industry in the near future. This trend toward consolidation and convergence may significantly increase the capital base and geographic reach of some of our competitors. Some of the financial institutions resulting from this consolidation may, by virtue of their increased size and business scope, provide greater competition for us.

 

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Risks relating to Korea

 

Unfavorable financial and economic developments in Korea may have an adverse effect on us.

 

We are incorporated in Korea, and substantially all of our operations are located in Korea. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea. The economic indicators in Korea in recent years have shown mixed signs of growth and uncertainty, and future growth of the economy is subject to many factors beyond our control. Recent developments in the Middle East, including the war in Iraq and its aftermath, higher oil and commodity prices, the general weakness of the U.S. and global economy, the possibility of an outbreak of avian flu in Asia and other parts of the world, and recent difficult conditions and volatility in the U.S. and worldwide credit markets have increased the uncertainty of global economic prospects in general and may continue to adversely affect the Korean economy. Any future deterioration of the Korean or global economy could adversely affect our financial condition and results of operations.

 

Developments that could hurt Korea’s economy in the future include:

 

   

adverse changes or volatility in foreign currency reserve levels, commodity prices (including a further increase in oil prices), exchange rates (including fluctuation of the U.S. dollar or Japanese yen exchange rates or revaluation of the Chinese renminbi), interest rates and stock markets;

 

   

substantial decreases in the market prices of Korean real estate;

 

   

financial problems or lack of progress in restructuring of Korean conglomerates, other large troubled companies, their suppliers or the financial sector;

 

   

loss of investor confidence arising from corporate accounting irregularities and corporate governance issues at certain Korean conglomerates;

 

   

a slowdown in consumer spending and the overall economy;

 

   

adverse developments in the economies of countries that are important export markets for Korea, such as the United States, Japan and China, or in emerging market economies in Asia or elsewhere;

 

   

the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China);

 

   

social and labor unrest;

 

   

a decrease in tax revenues and a substantial increase in the Korean government’s expenditures for unemployment compensation and other social programs that, together, would lead to an increased government budget deficit;

 

   

the economic impact of any pending or future free trade agreements, including the Free Trade Agreement recently negotiated with the United States;

 

   

geo-political uncertainty and risk of further attacks by terrorist groups around the world;

 

   

the recurrence of severe acute respiratory syndrome, or SARS, or an outbreak of avian flu in Asia and other parts of the world;

 

   

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from trade disputes or disagreements in foreign policy;

 

   

political uncertainty or increasing strife among or within political parties in Korea;

 

   

hostilities involving oil producing countries in the Middle East and any material disruption in the supply of oil or increase in the price of oil; and

 

   

an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States.

 

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Escalations in tensions with North Korea could have an adverse effect on us and the market price of our ADSs.

 

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. In recent years, there have been heightened security concerns stemming from North Korea’s nuclear weapon and long-range missile programs and increased uncertainty regarding North Korea’s actions and possible responses from the international community. In December 2002, North Korea removed the seals and surveillance equipment from its Yongbyon nuclear power plant and evicted inspectors from the United Nations International Atomic Energy Agency. In January 2003, North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty. Since the renouncement, Korea, the United States, North Korea, China, Japan and Russia have held numerous rounds of six party multi-lateral talks in an effort to resolve issues relating to North Korea’s nuclear weapons program.

 

In addition to conducting test flights of long-range missiles, North Korea announced in October 2006 that it had successfully conducted a nuclear test, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council passed a resolution that prohibits any United Nations member state from conducting transactions with North Korea in connection with any large scale arms and material or technology related to missile development or weapons of mass destruction and from providing luxury goods to North Korea, imposes an asset freeze and travel ban on persons associated with North Korea’s weapons program, and calls upon all United Nations member states to take cooperative action, including through inspection of cargo to or from North Korea. In response, North Korea agreed in February 2007 at the six-party talks to shut down and seal the Yongbyon nuclear facility, including the reprocessing facility, and readmit international inspectors to conduct all necessary monitoring and verifications. In October 2007, Korea and North Korea held a summit meeting to discuss easing tensions and fostering peace on the Korean peninsula. Despite these recent initiatives, there can be no assurance that the level of tension on the Korean peninsula will not escalate in the future.

 

In particular, there is no guarantee that the new administration in Korea, which took office in February 2008, will continue the policy on North Korea of the previous administration or that the high-level contacts between Korea and North Korea will continue. Any further increase in tensions, which may occur, for example, if high-level contacts break down or military hostilities occur, could have a material adverse effect on our operations and the market value of our common stock and ADSs.

 

Labor unrest in Korea may adversely affect our operations.

 

Any future economic downturn in Korea or an increase in corporate reorganizations and bankruptcies could result in layoffs and higher unemployment. Such developments could lead to social unrest and substantially increase government expenditures for unemployment compensation and other costs for social programs. According to statistics from the Korea National Statistics Office, the unemployment rate increased from 3.6% in 2003 to 3.7% in 2004 and 2005 but decreased to 3.5% in 2006. In 2007, the unemployment rate decreased further to 3.2%. An increase in unemployment and any resulting labor unrest in the future could adversely affect our operations, as well as the operations of many of our customers and their ability to repay their loans, and could adversely affect the financial condition of Korean companies in general, depressing the price of their securities. These developments would likely have an adverse effect on our financial condition and results of operations.

 

Financial instability in other countries, particularly emerging market countries in Asia, could adversely impact our business and cause the price of the ADSs to go down.

 

The Korean market and the Korean economy are influenced by economic and market conditions in other countries, particularly emerging market countries in Asia, including China. Financial turmoil in Asia, Russia and elsewhere in the world in the past has adversely affected the Korean economy. Although economic conditions are different in each country, investors’ reactions to developments in one country can have adverse effects on the

 

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securities of companies in other countries, including Korea. A loss of investor confidence in the financial systems of emerging and other markets may cause increased volatility in Korean financial markets. We cannot be certain that financial events of the type that occurred in emerging markets in Asia in 1997 and 1998 will not happen again in Asia or in other markets in which we may invest, or that such events will not have an adverse effect on our business or the price of our common stock and ADSs.

 

Risks relating to our common stock and ADSs

 

The market price of our common stock and ADSs could be depressed by the ability of the KDIC to sell large blocks of our common stock.

 

The KDIC currently owns 588,158,609 shares, or 72.97%, of our outstanding common stock. In the future, the KDIC may choose to sell large blocks of our common stock publicly or privately to a strategic or financial investor, including for the purpose of recovering the public funds it injected into our subsidiaries to recapitalize them. For example, in September 2004, the KDIC sold approximately 45 million of our shares of common stock in a private offering for approximately (Won)324 billion, which constituted 5.7% of our outstanding common stock, and in June 2007, the KDIC disposed of approximately 40 million shares of our common stock, which constituted 5.0% of our outstanding common stock. Under the Financial Holding Company Act, the KDIC was originally required to dispose of all of its holdings of our common stock by the end of March 2005, but the deadline was subsequently extended and then abolished in March 2008 as a result of an amendment to the Financial Holding Company Act.

 

According to the privatization plans announced by the KDIC, the KDIC will seek to dispose of all of its holdings of our common stock through registered or overseas offerings, sales to strategic investors, block sales and other available means, in a manner consistent with its mandate from the Korean government to maximize its returns and contribute to the development of the Korean financial industry in connection with such disposal. However, such plans are subject to change depending on market conditions and other factors. Accordingly, we do not know when, how or what percentage of our shares owned by the KDIC will be disposed of, or to whom such shares will be sold. As a result, we cannot predict the impact of such sales on us or our stock prices. Any future sales of our common stock or ADSs in the public market or otherwise by the KDIC, or the possibility that such sales may occur, could depress the prevailing market prices of our common stock and ADSs.

 

Ownership of our common stock is restricted under Korean law.

 

Under Korean law, a single stockholder, together with its affiliates, is generally prohibited from owning more than 10.0% of the outstanding shares of voting stock of a financial holding company such as us that controls nationwide banks, with the exception of certain stockholders that are non-financial business group companies, whose applicable limit is 4.0%. The Korean government and the KDIC are exempt from this limit, and investors may also exceed the 10.0% limit upon approval by the Financial Services Commission. See “Item 4B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Restrictions on Ownership of a Financial Holding Company.” To the extent that the total number of shares of our common stock (including those represented by ADSs) that you and your affiliates own together exceeds the applicable limits, you will not be entitled to exercise the voting rights for the excess shares, and the Financial Services Commission may order you to dispose of the excess shares within a period of up to six months. Failure to comply with such an order would result in an administrative fine of up to (Won)50 million and/or up to 0.03% of the book value of such shares per day until the date of disposal.

 

You will not be able to exercise dissent and appraisal rights unless you have withdrawn the underlying shares of our common stock and become our direct stockholder.

 

In some limited circumstances, including the transfer of the whole or any significant part of our business and the merger or consolidation of us with another company, dissenting stockholders have the right to require us to purchase their shares under Korean law. However, if you hold our ADSs, you will not be able to exercise such

 

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dissent and appraisal rights if the depositary refuses to do so on your behalf. Our deposit agreement does not require the depositary to take any action in respect of exercising dissent and appraisal rights. In such a situation, holders of our ADSs must withdraw the underlying common stock from the ADS facility (and incur charges relating to that withdrawal) and become our direct stockholder prior to the record date of the stockholders’ meeting at which the relevant transaction is to be approved, in order to exercise dissent and appraisal rights.

 

You may be limited in your ability to deposit or withdraw common stock.

 

Under the terms of our deposit agreement, holders of common stock may deposit such stock with the depositary’s custodian in Korea and obtain ADSs, and holders of ADSs may surrender ADSs to the depositary and receive common stock. However, to the extent that a deposit of common stock exceeds any limit that we may specify from time to time, that common stock will not be accepted for deposit unless our consent with respect to such deposit has been obtained. We currently have not set any such limit; however, we have the right to do so at any time. Under the terms of the deposit agreement, no consent would be required if the shares of common stock were to be obtained through a dividend, free distribution, rights offering or reclassification of such stock. We have consented, under the terms of the deposit agreement, to any deposit unless the deposit would be prohibited by applicable laws or violate our articles of incorporation. If we choose to impose a limit on deposits in the future, however, we might not consent to the deposit of any additional common stock. In that circumstance, if you surrender ADSs and withdraw common stock, you may not be able to deposit the stock again to obtain ADSs. See “Item 9C. Markets—Restrictions Applicable to Shares.”

 

You will not have preemptive rights in some circumstances.

 

The Korean Commercial Code of 1962, as amended, and our articles of incorporation require us, with some exceptions, to offer stockholders the right to subscribe for new shares of our common stock in proportion to their existing shareholding ratio whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the depositary, after consultation with us, may make the rights available to holders of our ADSs or use commercially feasible efforts to dispose of the rights on behalf of such holders, in a riskless principal capacity, and make the net proceeds available to such holders. The depositary will make rights available to holders of our ADSs only if:

 

   

we have requested in a timely manner that those rights be made available to such holders;

 

   

the depositary has received the documents that are required to be delivered under the terms of the deposit agreement, which may include confirmation that a registration statement filed by us under the U.S. Securities Act of 1933, as amended, is in effect with respect to those shares or that the offering and sale of those shares is exempt from or is not subject to the registration requirements of the Securities Act; and

 

   

the depositary determines, after consulting with us, that the distribution of rights is lawful and commercially feasible.

 

Holders of our common stock located in the United States may not exercise any rights they receive absent registration or an exemption from the registration requirements under the Securities Act.

 

We are under no obligation to file any registration statement with the U.S. Securities and Exchange Commission or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings. If a registration statement is required for you to exercise preemptive rights but is not filed by us or is not declared effective, you will not be able to exercise your preemptive rights for additional ADSs and you will suffer dilution of your equity interest in us. If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or feasible, it will allow the rights to lapse, in which case you will receive no value for these rights.

 

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Your dividend payments and the amount you may realize upon a sale of your ADSs will be affected by fluctuations in the exchange rate between the U.S. dollar and the Won.

 

Our common stock is listed on the Stock Market Division of the Korea Exchange and quoted and traded in Won. Cash dividends, if any, in respect of the shares represented by the ADSs will be paid to the depositary in Won and then converted by the depositary into U.S. dollars, subject to certain conditions. Accordingly, fluctuations in the exchange rate between the Won and the U.S. dollar will affect, among other things, the amounts you will receive from the depositary in respect of dividends, the U.S. dollar value of the proceeds that you would receive upon sale in Korea of the shares of our common stock obtained upon surrender of ADSs and the secondary market price of ADSs. Such fluctuations will also affect the U.S. dollar value of dividends and sales proceeds received by holders of our common stock.

 

The market value of your investment may fluctuate due to the volatility of, and government intervention in, the Korean securities market.

 

Our common stock is listed on the Stock Market Division of the Korea Exchange, which has a smaller market capitalization and is more volatile than the securities markets in the United States and many European countries. The market value of ADSs may fluctuate in response to the fluctuation of the trading price of shares of our common stock on the Stock Market Division of the Korea Exchange. The Stock Market Division of the Korea Exchange has experienced substantial fluctuations in the prices and volumes of sales of listed securities and has prescribed a fixed range in which share prices are permitted to move on a daily basis. In the past, the Korea Composite Stock Price Index, known as the “KOSPI,” reached a peak of 1,138.75 in 1994 and subsequently fell to a low of 280.00 in 1998. On June 23, 2008, the KOSPI closed at 1,715.59. Like other securities markets, including those in developed countries, the Korean securities market has experienced problems including market manipulation, insider trading and settlement failures. The recurrence of these or similar problems could have a material adverse effect on the market price and liquidity of the securities of Korean companies, including our common stock and ADSs, in both the domestic and the international markets.

 

The Korean government has the potential ability to exert substantial influence over many aspects of the private sector business community, and in the past has exerted that influence from time to time. For example, the Korean government has induced mergers to reduce what it considers excess capacity in a particular industry and has also induced private companies to publicly offer their securities. Similar actions in the future could have the effect of depressing or boosting the Korean securities market, whether or not intended to do so. Accordingly, actions by the government, or the perception that such actions are taking place, may take place or has ceased, may cause sudden movements in the market prices of the securities of Korean companies in the future, which may affect the market price and liquidity of our common stock and ADSs.

 

If the Korean government deems that emergency circumstances are likely to occur, it may restrict you and the depositary from converting and remitting dividends and other amounts in U.S. dollars.

 

If the Korean government deems that certain emergency circumstances, including, but not limited to, severe and sudden changes in domestic or overseas economic circumstances, extreme difficulty in stabilizing the balance of payments or implementing currency, exchange rate and other macroeconomic policies, have occurred or are likely to occur, it may impose certain restrictions provided for under the Foreign Exchange Transaction Law, including the suspension of payments or requiring prior approval from governmental authorities for any transaction. See “Item 10D. Exchange Controls—General.”

 

Other Risks

 

You may not be able to enforce a judgment of a foreign court against us.

 

We are a corporation with limited liability organized under the laws of Korea. Substantially all of our directors and officers and other persons named in this annual report reside in Korea, and all or a significant

 

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portion of the assets of our directors and officers and other persons named in this annual report and substantially all of our assets are located in Korea. As a result, it may not be possible for you to effect service of process within the United States, or to enforce against them or us in the United States judgments obtained in United States courts based on the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Korea, either in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated on the United States federal securities laws.

 

Item 4. INFORMATION ON THE COMPANY

 

Item 4A. History and Development of the Company

 

Overview

 

Woori Finance Holdings was incorporated as Korea’s first financial holding company on March 27, 2001 and commenced commercial operations on April 2, 2001. We were established by the KDIC to consolidate the Korean government’s interests in:

 

   

four commercial banks (Hanvit Bank (since renamed Woori Bank), Kyongnam Bank, Kwangju Bank and Peace Bank of Korea (since renamed Woori Credit Card and merged with Woori Bank)),

 

   

one merchant bank (Hanaro Merchant Bank (since renamed Woori Investment Bank and merged with Woori Bank)), and

 

   

a number of other smaller financial institutions.

 

We were created pursuant to the Financial Holding Company Act, which was enacted in October 2000 and which, together with associated regulations and a related presidential decree, has enabled banks and other financial institutions, including insurance companies, investment trust companies, credit card companies and securities companies, to be organized and managed under the auspices of a single financial holding company.

 

Our legal and commercial name is Woori Finance Holdings Co., Ltd. Our registered office and corporate headquarters are located at 203 Hoehyon-dong, 1-ga, Chung-gu, Seoul, Korea. Our telephone number is 822-2125-2000. Our website address is http://www.woorifg.com.

 

History

 

Establishment of Woori Finance Holdings

 

In response to the financial and economic downturn beginning in late 1997, the Korean government announced and implemented a series of comprehensive policy packages to address structural weaknesses in the Korean economy and the financial sector. As part of these measures, on October 1, 1998, the KDIC purchased 95.0% of the outstanding shares of Hanvit Bank (which was at the time named the Commercial Bank of Korea) and 95.6% of the outstanding shares of Hanil Bank (which was subsequently merged into Hanvit Bank). These banks had suffered significant losses in 1997 and 1998. On a Korean GAAP basis, the Commercial Bank of Korea incurred losses of (Won)164 billion in 1997 and (Won)1,644 billion in the first ten months of 1998, while Hanil Bank incurred losses of (Won)281 billion in 1997 and (Won)1,717 billion in the first ten months of 1998. The Korean government took pre-emptive measures to ensure the survival of these and other banks as it believed that bank failures would have a substantial negative impact on the Korean economy. The KDIC acquired the Commercial Bank of Korea and Hanil Bank in particular because they were two of the largest nationwide banks and it was believed that their continued existence was accordingly important to help preserve the stability of Korea’s financial system.

 

Despite the measures implemented by the government, however, the predecessor operations of substantially all of our subsidiaries recorded significant losses in 1999 and 2000, primarily as a result of high levels of non-performing credits and loan loss provisioning. Based on subsequent audits conducted by the Financial

 

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Supervisory Service of a number of Korean commercial and merchant banks, the Financial Services Commission announced in April 2000 that certain financial institutions had a high risk of insolvency and that substantial remedial measures were required.

 

Commercial Banking Operations. The Korean government, through the Financial Services Commission, decided in December 2000 to write down the capital of each of Hanvit Bank (now Woori Bank), Kyongnam Bank, Kwangju Bank and Peace Bank of Korea (which was renamed Woori Credit Card and eventually merged with Woori Bank) to zero. It accomplished this by having the Financial Services Commission issue a capital reduction order with respect to these banks pursuant to its regulatory authority. Under Korean law, the Financial Services Commission has the power to order a distressed financial institution to effect a capital reduction by requiring it either to cancel the whole or a part of the shares held by certain shareholders with or without consideration or to effect a reverse stock-split with respect to the shares owned by certain shareholders. Although the precise requirements of any particular order will vary on a case by case basis, with respect to these banks, the capital reduction order required them to cancel their outstanding shares without providing consideration to shareholders.

 

After that order was issued by the Financial Services Commission, it was ratified by the board of directors of each bank. Immediately following that ratification, each bank published a notice in two newspapers in Korea that informed shareholders who dissented as to the capital reduction that the relevant bank would be required to purchase their shares, so long as they made a request in writing no more than ten business days following the publication date. Each bank purchased the shares owned by dissenting shareholders within two months after receiving those requests, in each case at a price negotiated between the bank and its dissenting shareholders. With respect to each of the four banks, the bank and the dissenting shareholders were unable to agree on a purchase price. Accordingly, an accounting expert determined that price. Although the shareholders of each of Hanvit Bank, Kyongnam Bank and Kwangju Bank subsequently requested, pursuant to Korean law, that a court review and adjust the determined price, the court in each case declined to make any such adjustment.

 

The Korean government also decided to recapitalize these banks by injecting public funds through the KDIC in two parts. The first part of this recapitalization would comprise capital injections of approximately (Won)3.6 trillion, in return for new shares of the relevant banks, to eliminate their capital deficits, while the second part would comprise further capital contributions of approximately W2.6 trillion, without consideration, to increase their capital adequacy ratios to more than 10%. Accordingly, trading of shares of these four commercial banks was suspended in December 2000, and the capital of each was written down to zero after each bank purchased outstanding shares from the then-existing dissenting minority shareholders. On December 22, 2000, the Korean government and the labor unions of the four commercial banks entered into an agreement under which the labor unions consented to a plan to include their respective banks as subsidiaries of a state-run financial holding company that would have full management rights to oversee the restructuring of those banks.

 

In December 2000, the KDIC made initial capital injections to Hanvit Bank ((Won)2,764 billion), Kyongnam Bank ((Won)259 billion), Kwangju Bank ((Won)170 billion) and Peace Bank of Korea ((Won)273 billion), in return for new shares of those banks. The KDIC also agreed to make additional capital contributions, not involving the issuance of new shares, in the future, which were made in September 2001 to Hanvit Bank ((Won)1,877 billion), Kyongnam Bank ((Won)94 billion), Kwangju Bank ((Won)273 billion) and Peace Bank of Korea ((Won)339 billion). These subsequent capital contributions were made pursuant to a memorandum of understanding entered into among the KDIC and the four commercial banks on December 30, 2000. The terms of the memorandum of understanding provided that the four banks would subscribe for bonds issued by the KDIC in an aggregate principal amount equal to the capital contribution amount agreed to by the KDIC, and that the KDIC would then pay the subscription price back to the banks as capital contributions. From the perspective of the KDIC, the issuance of the bonds avoided the need to raise additional cash in connection with the capital contributions. From the perspective of the banks, the KDIC bonds qualified as low-risk assets that helped increase their capital adequacy ratios. The KDIC bonds also paid interest at market rates and were liquid instruments that could be readily sold in the market by the banks for cash.

 

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Merchant Banking Operations. On November 3, 2000, the KDIC established Hanaro Merchant Bank (which was renamed Woori Investment Bank) to restructure substantially all of the assets and liabilities of four failed merchant banks (Yeungnam Merchant Banking Corporation, Central Banking Corporation, Korea Merchant Banking Corporation and H&S Investment Bank) that were transferred to it.

 

Formation of Financial Holding Company. Partly as a response to perceived inefficiencies in the mechanism by which Korean financial institutions were managed and partly as a first step to divesting itself of its stake in these and other recapitalized financial institutions, the Korean government implemented a number of significant initiatives relating to the Korean financial industry. One of these initiatives, the Financial Holding Company Act, together with associated regulations and a related presidential decree, created a means by which banks and other financial institutions, including insurance companies, investment trust companies, credit card companies and securities companies, could be organized and managed under the auspices of a single financial holding company.

 

In January 2001, Hanvit Bank, Kyongnam Bank, Kwangju Bank, Peace Bank of Korea and Hanaro Merchant Bank agreed in principle to consolidate and become subsidiaries of a new financial holding company. In July 2001, each entity entered into a memorandum of understanding with us, and we entered into a separate memorandum of understanding with the KDIC. These memoranda of understanding along with those entered with between our subsidiaries and the KDIC, which are described in more detail below, established the basis for the relationships among us, our subsidiaries and the KDIC. These memoranda set forth, among other things, financial targets and restructuring objectives that we and our subsidiaries were expected to satisfy in order to create a fully integrated financial services provider and to enable the KDIC to recover the public funds used to recapitalize our subsidiaries. On March 27, 2001, the KDIC transferred all of its shares in each of Hanvit Bank, Kyongnam Bank, Kwangju Bank, Peace Bank of Korea and Hanaro Merchant Bank to our company in exchange for our newly issued shares. Accordingly, we became the sole owner of those subsidiaries. We subsequently listed our shares on the Stock Market Division of the Korea Exchange on June 24, 2002.

 

Pursuant to the terms of the Financial Holding Company Act, we are subject to certain limitations on our activities that would not be applicable to most other Korean corporations. For example, we:

 

   

may not engage in any business other than managing our subsidiaries;

 

   

must obtain prior approval from, or file a prior report with, the Financial Services Commission before we can acquire control of another company;

 

   

must obtain permission from the Financial Services Commission to liquidate or to merge with another company;

 

   

must inform the Financial Services Commission if there is any change in our officers, directors or largest shareholder; and

 

   

must inform the Financial Services Commission if we cease to control any of our direct or indirect subsidiaries by disposing of shares in those subsidiaries.

 

See “Item 4B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies.”

 

Relationship with the Korean Government

 

Our relationship with the Korean government is governed by a number of agreements, including in particular the agreements discussed below. In addition, the Korean government, through the KDIC, is our largest shareholder and accordingly has the ability to require us to take a number of actions beyond those specifically covered by these agreements. See “Item 3D. Risk Factors—Risks relating to government control” and “—Risks relating to government regulation and policy.”

 

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Labor-Government Agreement. Under the December 2000 agreement between our subsidiaries’ labor unions and the Korean government, we control the management strategies of our subsidiaries and have the ability to dispose of overlapping business lines. Pursuant to this agreement, any downsizing that may be required in connection with the reorganization of our subsidiaries’ operations should be implemented based on separate agreements concluded between us and our subsidiaries’ labor unions. In July 2002, we reached an agreement with the labor unions of Kyongnam Bank and Kwangju Bank pursuant to which we agreed to maintain the two banks as separate entities, while integrating the operating standards (including risk management operations) and information technology systems of our commercial banking subsidiaries.

 

Memoranda of Understanding between our Subsidiaries and the KDIC. In December 2000, in connection with the capital contributions made by the KDIC into each of Hanvit Bank, Kyongnam Bank, Kwangju Bank, Peace Bank of Korea and Hanaro Merchant Bank, these subsidiaries entered into separate memoranda of understanding with the KDIC that included business normalization plans. The plans were substantially identical with respect to each bank, other than with respect to specific financial targets, and primarily dealt with each subsidiary’s obligation to implement a two-year business normalization plan covering 2001 and 2002. To the extent that any subsidiary fails to implement its business normalization plan or to meet financial targets, the KDIC has the right to impose sanctions on that subsidiary’s directors or employees, or to require the subsidiary to take certain actions. In addition, each subsidiary is required to take all actions necessary to enable us to return to the KDIC any public funds injected into them, so long as that action does not cause a material adverse effect on the normalization of business operations as contemplated by the memorandum of understanding.

 

Each subsidiary prepared a two-year business normalization plan that was approved by the KDIC. Each plan included recapitalization goals and deadlines, econometric models, plans to dispose of non-performing loans, cost reduction initiatives, future management and business strategies and other restructuring plans. Each plan also set forth six financial targets for each quarter of 2001 and 2002 that the applicable subsidiary was required to meet.

 

In addition, the directors of each subsidiary executed a letter of undertaking, pursuant to which they assumed responsibility for the relevant subsidiary’s performance in executing these obligations.

 

Under each memorandum of understanding, the KDIC could exercise its discretion in determining whether to take punitive measures against any subsidiary that failed to meet any financial targets. The subsidiaries generally met their targets, other than Peace Bank of Korea, which failed to meet five of its six financial targets as of June 30, 2001. We decided to merge Peace Bank of Korea’s commercial banking business into Hanvit Bank and to transform Peace Bank of Korea into our credit card subsidiary, Woori Credit Card. See “—Reorganization and Integration Plan.” In March 2002, Woori Credit Card entered into a memorandum of understanding with the KDIC that included a business normalization plan. This replaced the earlier memorandum of understanding entered into by Peace Bank of Korea and the KDIC in December 2000. The business normalization plan was substantially similar to the business normalization plan agreed to by Peace Bank of Korea.

 

Woori Investment Bank (formerly known as Hanaro Merchant Bank) also failed to meet three of its six financial targets as of December 31, 2002. In August 2003, we merged Woori Investment Bank with Woori Bank.

 

The subsidiaries (with the exception of Woori Investment Bank and Woori Credit Card) entered into a new business normalization plan with new restructuring measures and financial targets with the KDIC in January 2003. In May 2003, Woori Credit Card entered into a similar business normalization plan with the KDIC. Woori Credit Card failed to meet three of its five financial targets as of June 30 and September 30, 2003 and failed to meet four of its five financial targets as of December 31, 2003. As a result of these failures, the KDIC imposed penalties on Woori Credit Card, including the termination of certain members of its senior management and the reduction of the compensation of certain others. In December 2003, our board of directors resolved to merge Woori Credit Card with Woori Bank, which merger was completed in March 2004. Kwangju Bank and

 

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Kyongnam Bank also failed to meet their respective return on assets target as of December 31, 2003, although they met such target as of March 31, 2004. Due to its merger with Woori Credit Card, Woori Bank also failed to meet its return on assets target and operating profit per employee target as of June 30, 2004. We negotiated with the KDIC to adjust some of the financial targets applicable to us and our subsidiaries under our memoranda of understanding and, as a result, each of Woori Bank, Kyongnam Bank and Kwangju Bank met its financial targets as of December 31, 2004.

 

Our subsidiaries entered into a new business normalization plan with new restructuring measures and financial targets with the KDIC on April 2005. In addition to the new restructuring measures and financial targets, the plan primarily dealt with ways to reduce labor cost and increase employees’ productivity and efficiency in our subsidiaries. Each of Woori Bank, Kyongnam Bank and Kwangju Bank met its financial targets under the plan. Each of Woori Bank, Kyongnam Bank and Kwangju Bank entered into a new business normalization plan with the KDIC in April 2007. See “—Recent Developments with the KDIC.”

 

Memorandum of Understanding with the KDIC. In July 2001, we entered into a memorandum of understanding with the KDIC, which included financial targets and a business plan. Under this memorandum, we are required to take all actions necessary (including making dividend payments and share buybacks and cancellations) to return the public funds injected into us by the KDIC, but only to the extent that these actions would not cause a material adverse effect on the contemplated normalization of our operations. To the extent that we fail to perform our obligations, the KDIC is entitled to impose sanctions on our directors and employees, ranging from warnings and wage reductions to suspension or termination of employment. The KDIC can also order us to take remedial measures against those subsidiaries with whom we have entered into separate memoranda of understanding. See “—Memoranda of Understanding with our Subsidiaries.”

 

In addition, our directors executed a letter of undertaking, pursuant to which they assumed responsibility for our performance of these obligations.

 

The business plan included in the memorandum of understanding, which we prepared and which the KDIC approved, set forth the basis on which we were to manage the normalization and integration of our subsidiaries’ operations and to return the public funds that were injected into them. The business plan also set financial targets for our capital ratio, return on total assets, expense-to-revenue ratio, operating income per employee, non-performing loan ratio and holding company expense ratio. We were required to meet these financial targets on a semi-annual basis. The memorandum of understanding will terminate once the KDIC loses its status as our largest shareholder.

 

We failed to meet three of the financial targets as of June 30, 2004, which were return on total assets, expense to revenue ratio, and operating income per employee. The KDIC notified us that we could not improve fringe benefits for our employees (including salaries), and ordered us to devise and report to the KDIC a plan to meet those three financial targets. We negotiated with the KDIC to adjust some of the financial targets applicable to us and our subsidiaries under our memoranda of understanding and, as a result, we met our financial targets as of December 31, 2004.

 

Pursuant to the terms of this memorandum of understanding, we entered into a new business normalization plan with new restructuring measures and financial targets with the KDIC in April 2005. In addition to the new restructuring measures and financial targets, the plan primarily dealt with ways to increase labor efficiency and to set up a comprehensive financial network for increased synergy among the group members and strengthening our incentive-based management system. We met all of our financial targets under the plan. We entered into a new business normalization plan with the KDIC in April 2007. See “—Recent Developments with the KDIC.”

 

Memoranda of Understanding with Our Subsidiaries. In July 2001, we entered into separate memoranda of understanding with each of Hanvit Bank, Kyongnam Bank, Kwangju Bank, Peace Bank of Korea and Hanaro

 

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Merchant Bank, each of which included financial targets and a business initiative plan. The plans are substantially identical with respect to each subsidiary, other than with respect to specific financial targets, and each plan is primarily intended to define the respective roles of us and each of our subsidiaries within the context of the financial group as a whole, including our rights and our obligations with respect to each subsidiary. These include each subsidiary’s obligations to implement its business initiative plan and to meet the financial targets set forth in the respective memorandum of understanding on a quarterly basis, and certain other matters that we may require from time to time. Each business initiative plan sets forth initiatives related to each subsidiary’s operational integration. For example, Hanvit Bank’s initial business initiative plan included:

 

   

cooperating with us to develop an integrated management and support system for us to oversee the operations of our subsidiaries;

 

   

disposing of redundant branches and certain subsidiaries;

 

   

adopting U.S. GAAP accounting; and

 

   

cooperating with us to consolidate our risk management operations and information technology systems, establish an information technology subsidiary, consolidate our credit card business, dispose of non-performing assets and establish our asset management subsidiary.

 

Subsequent business initiative plans have required Woori Bank to continue these activities and undertake new initiatives.

 

Under the terms of each memorandum of understanding, our role within the group includes supervising the implementation of overall management policies and strategies, determining business targets for each subsidiary in order to meet our respective business targets, consulting with each subsidiary with respect to its business plans, budgets, dividend policies and capital increases, evaluating the management of each subsidiary and determining management compensation. The role of each subsidiary includes executing the business targets we set, consulting with us with respect to important management decisions, developing a restructuring execution plan and cooperating with respect to paying consulting fees incurred in connection with developing business strategies.

 

If we determine that a subsidiary has failed to perform its obligations under its memorandum of understanding, we have the right to impose sanctions on its directors or employees, or to take other remedial measures. Each memorandum of understanding also provides that it will terminate if the subsidiary loses its status as our subsidiary under the Financial Holding Company Act. The memorandum of understanding would not, however, terminate simply if the KDIC were to lose its status as our largest shareholder.

 

The specified financial targets for 2007 and 2008 that are to be met by Woori Bank, Kyongnam Bank and Kwangju Bank are identical to those imposed by the KDIC on those subsidiaries.

 

Recent Developments with the KDIC. In April 2007, we and Woori Bank, Kyongnam Bank and Kwangju Bank each entered into a new two-year business normalization plan with the KDIC that included new restructuring measures and financial targets. In addition, the plan primarily dealt with ways to increase labor efficiency and to set up a comprehensive financial network for increased synergy among the group members and strengthening our incentive-based management system. The other terms of the previously agreed memoranda of understanding remain unchanged.

 

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Our two-year business normalization plan sets forth the basis on which we should manage the normalization and integration of our subsidiaries’ operations as well as return the public funds that were injected into those subsidiaries. The business normalization plan sets forth six financial targets for each quarter of 2007 and 2008 that we are required to meet on a Korean GAAP basis. Our Korean GAAP targets for each six-month period in 2008 are set forth in the following table:

 

     Six-month period ended  
     2008  
     June     December  

Capital adequacy ratio (1)

     9.5 %     9.7 %

Return on total assets (2)

     0.6       0.7  

Expense-to-revenue ratio (3)

     51.8       50.5  

Operating income per employee (Won millions) (4)

   (Won) 360     (Won) 370  

Non-performing loan ratio (5)

     1.0 %     1.0 %

Holding company expense ratio (6)

     0.6       0.6  

 

(1)

For a description of how the capital adequacy ratio is calculated, see “Item 4B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Capital Adequacy.”

(2)

Represents the ratio of net income (excluding proceeds from sales of certain equity securities held by Woori Bank as a result of prior debt-to-equity swaps) to total assets.

(3)

Represents the ratio of general and administrative expenses to adjusted operating income. Adjusted operating income represents operating income before loan loss provisions and general and administrative expenses.

(4)

Represents the ratio of adjusted operating income to total number of employees.

(5)

Represents the ratio of total credits classified as substandard or below to total credits, in each case, net of provisions.

(6)

Represents the ratio of the holding company’s expenses to adjusted operating income of its subsidiaries.

 

Each of Woori Bank, Kyongnam Bank and Kwangju Bank also submitted similar two-year business normalization plans that contain similar financial targets that each subsidiary is required to meet. We expect that we and these subsidiaries will be required to enter into new business normalization plans with the KDIC every two years so long as the KDIC remains our largest shareholder.

 

Reorganization and Integration Plan

 

Following our establishment and our acquisition of our subsidiaries, we developed a reorganization and integration plan designed to reorganize the corporate structure of some of our subsidiaries and integrate our operations under a single management structure. As part of this plan, and after receiving approval from the Financial Services Commission for each of these measures:

 

   

From December 2001 through February 2002, we restructured Peace Bank of Korea by:

 

   

splitting off its commercial banking operations and merging them into Woori Bank;

 

   

changing the name of Peace Bank of Korea to Woori Credit Card; and

 

   

transferring the credit card operations of Woori Bank to Woori Credit Card. In connection with this transfer, Woori Credit Card acquired all of the existing credit card accounts of Woori Bank but none of the outstanding receivables with respect to such accounts, which remained with Woori Bank.

 

   

In March 2002, we made Woori Investment Trust Management a direct subsidiary by acquiring all of its outstanding capital stock from Woori Bank.

 

   

In July 2002, we made Woori Securities a direct subsidiary by acquiring a majority of its outstanding capital stock from Woori Bank.

 

   

In March 2003, we transferred the credit card operations of Kwangju Bank to Woori Credit Card.

 

   

In August 2003, we merged Woori Investment Bank with Woori Bank by exchanging Woori Investment Bank’s shares with shares of Woori Bank.

 

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In addition, as part of our integration efforts under the plan:

 

   

In 2002, we standardized the logo of certain of our subsidiaries, including Woori Bank, Woori Securities and Woori Investment Trust Management.

 

   

In 2002, Woori Bank streamlined its appropriation procedures for goods and services, and we have implemented these procedures on a group-wide level to reduce costs.

 

As part of our overall reorganization and integration plan, we completed our business process re-engineering project in November 2004, aimed at enhancing our marketing capabilities, reducing expenses and improving our warning and monitoring system for our credit portfolio. As a result of our implementation of this project, we have been awarded various patents and other intellectual property rights in connection with the project’s implementation and structure.

 

Furthermore,

 

   

In March 2004, we merged Woori Credit Card with Woori Bank. In connection with this merger, Woori Credit Card spun off and transferred to Kwangju Bank all of the existing credit card accounts (but none of the outstanding receivables with respect to such accounts) that Woori Credit Card had previously acquired from Kwangju Bank.

 

   

In June 2004, we acquired the 39.7% interest in Woori Securities that we did not own, and delisted it from the Stock Market Division of the Korea Exchange in July 2004.

 

   

In October and December 2004, we acquired an aggregate 27.3% voting interest in LGIS. In March 2005, we merged Woori Securities into LGIS and renamed the surviving entity Woori Investment & Securities, which became an equity method investee.

 

   

In May 2005, we acquired a 90.0% interest in LGITM, from Woori Investment & Securities and merged Woori Investment Trust Management into LGITM. We renamed the surviving entity Woori Asset Management, which remains a consolidated subsidiary. In July and September 2005, Woori Asset Management reacquired the remaining 10.0% interest from its minority shareholders. In May 2006, we transferred 30.0% of our interest in Woori Asset Management to Credit Suisse. Following this transfer, we renamed the entity Woori Credit Suisse Asset Management.

 

   

In October 2005, we established Woori Private Equity as a consolidated subsidiary.

 

   

In September 2007, we acquired a 51.4% interest in Hanmi Capital, which became a consolidated subsidiary, and renamed the entity Woori Financial.

 

   

In April 2008, we acquired a 51.0% interest in LIG Life Insurance. In connection with this acquisition, we entered into a joint venture agreement with Aviva International Holdings Limited. Aviva International Holdings Limited and we collectively hold a 91.7% interest in LIG Life Insurance, which was subsequently renamed Woori Aviva Life Insurance. We expect to account for Woori Aviva Life Insurance as an equity method investee under U.S. GAAP.

 

In addition, we have implemented a group-wide, standardized risk management system (except with respect to operational risk), including the standardization of the credit risk management systems of our subsidiaries which was completed in 2007. With respect to credit risk management systems, we have completed implementing standardized credit risk management systems based on Woori Bank’s system in all of our banking subsidiaries in 2007. With respect to operational risk management systems, we completed implementation of various aspects of the operational risk management system (not including the business risk management system) at Kyongnam Bank, Kwangju Bank and Woori Finance Information System in 2006, and expect to complete the implementation of such aspects of the operational risk management system at Woori Investment & Securities by the end of 2008.

 

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Item 4B. Business Overview

 

Business

 

We are Korea’s first financial holding company, and our operations include the second-largest commercial bank in Korea, in terms of total assets (including loans). Our subsidiaries collectively engage in a broad range of businesses, including commercial banking, credit cards, capital markets activities, international banking, asset management and bancassurance. We provide a wide range of products and services to our customers, which mainly comprise individuals and small- and medium-sized enterprises, as well as some of Korea’s largest corporations. As of December 31, 2007, we had consolidated total assets of (Won)230.9 trillion, consolidated total deposits of (Won)145.0 trillion and consolidated stockholders’ equity of (Won)12.1 trillion.

 

We were established as a financial holding company in March 2001, to consolidate the Korean government’s interest in a number of distressed financial institutions in the wake of the financial crisis in Korea in the late 1990s. Since our establishment, we have succeeded in restructuring our operations by: securing a solid capital base for our banking subsidiaries; improving the quality of our exposure to and our relationships in the large corporate sector; refocusing our lending activities on individual and small- and medium-sized enterprise customers to take advantage of our network of 1,144 branches nationwide; expanding our activities in the areas of credit cards, full service brokerage, asset management and bancassurance for our over 19 million retail customers; modernizing and strengthening our credit risk review and management capabilities; working to integrate and cross-sell our products and services; and striving to create a customer- and service-oriented culture that measures and rewards performance.

 

The following chart provides an overview of our structure, including our significant subsidiaries and our ownership of such subsidiaries as of the date of this annual report:

 

LOGO

 

(1)

Woori Investment & Securities is accounted for as an equity method investee.

(2)

Woori Aviva Life Insurance, in which we acquired a 51.0% interest in April 2008 and in respect of which we entered into a joint venture agreement with Aviva International Holdings Limited, is expected to be accounted for as an equity method investee under U.S. GAAP.

 

As one of the leading financial services groups in Korea, we believe our core competitive strengths include the following:

 

Financial holding company structure. We believe our financial holding company structure gives us a competitive advantage over commercial banks and unaffiliated financial services providers by:

 

   

allowing us to offer a more extensive range of financial products and services;

 

   

enabling us to share customer information, which is not permitted outside a financial holding company structure, thereby enhancing our risk management and cross-selling capabilities;

 

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enhancing our ability to reduce costs in areas such as back-office processing and procurement; and

 

   

enabling us to raise and manage capital on a centralized basis.

 

Strong and long standing relationships with corporate customers. Historically the operations of Woori Bank, our largest subsidiary, concentrated on large corporate customers. As a result, we believe that we have strong relationships with many of Korea’s leading corporate groups, and we are the main creditor bank to 15 of the 42 largest Korean corporations. Further enhancing our corporate loan portfolio is our growing ability to lend to small- and medium-sized enterprise customers, which numbered approximately 605,000 as of December 31, 2007.

 

Large and loyal retail customer base. With respect to our consumer banking operations, we have the second-largest deposit base of any Korean commercial bank, and over 19 million retail customers, representing about half of the Korean adult population. Of these customers, more than half are active customers, meaning that they have an account with us with a positive balance or have transacted business with us at least once during the last six months.

 

Extensive distribution and marketing network. We serve our customers primarily through the second-largest banking network in Korea, comprising over 1,144 branches and 8,416 ATMs and cash dispensers. Through Woori Bank, we also operate 13 dedicated corporate marketing centers and over 94 relationship managers for our large corporate customers and over 746 relationship professionals stationed at 659 branches for our small- and medium-sized enterprise customers. In addition, we have constructed new Internet and mobile banking platforms to enhance customer convenience, reduce service delivery costs and allow our branch staff to focus on marketing and sales.

 

Strong capital base. As of December 31, 2007, our consolidated stockholders’ equity totaled W12.1 trillion, and the combined capital adequacy ratio of our banking subsidiaries was 11.0%. Our management team at the holding company carefully coordinates the capital and dividend plans of each of our subsidiaries and for the consolidated group to ensure that we optimize our capital position. We believe our strong capital base and coordinated capital management enable us to support growth of our core businesses and to pursue franchise-enhancing initiatives such as selective investments and acquisitions.

 

Strong and experienced management team. Our management team comprises both experienced managers from our subsidiaries and their predecessor companies as well as leading experienced financial industry professionals who have been recruited from outside our group to complement our team. We expect that in late June 2008, Pal-Seung Lee, a former chief executive officer of Woori Investment & Securities, will assume the role of our chairman and chief executive officer, which we believe will enhance the quality of our management team and our corporate governance. We also believe that the extensive experience of many members of our management team in the financial sector will help us to continue to strengthen our operations.

 

Strategy

 

Our goal is to become a dynamic, leading full-service provider of financial services and products to corporate and consumer customers in Korea, and we will measure our success based on our ability to increase our profitability and shareholder value. We intend to capitalize on our strong market and financial position, which is the result of our restructuring over the past few years, to further strengthen our capabilities, customer penetration, efficiency and profitability. The key elements of our strategy are to:

 

Further improve our asset quality and strengthen our risk management practices. We were one of the earliest and most aggressive banks in Korea to actively reduce non-performing loans through charge-offs and sales to third parties. Since 2002, we have entered into joint venture arrangements with several financial institutions to facilitate the disposal of our substandard or below loans. As a result of these and other initiatives, our ratio of non-performing loans to total loans decreased from 9.8% at December 31, 2001 to 0.7% as of December 31, 2007.

 

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One of our highest priorities is to maintain our strong asset quality and enhance our risk management practices on an ongoing basis. We created a centralized group-wide risk management organization, installed a comprehensive warning and monitoring system, adopted uniform loan loss provisioning policies across all subsidiaries and implemented an advanced credit evaluation system called “CREPIA” at Woori Bank. Kyongnam Bank and Kwangju Bank currently use standardized credit evaluation systems based on the CREPIA system. In preparation for the implementation of Basel II, we completed upgrades to our credit risk management systems in 2007, including credit evaluation models, collateral management systems and non-performing credit management systems, as well as the implementation of a “credit risk measurement engine” to quantify our credit risk exposures.

 

In addition, we adopted a value at risk, or “VaR,” monitoring system for managing market risk. We intend to vigorously maintain a manageable risk profile and balance that risk profile with adequate returns. We believe that our continuous focus on upgrading our risk management systems and practices will enable us to maintain our strong asset quality, improve our financial performance and enhance our competitiveness.

 

Enhance customer profitability through optimization of channel usage, products and services for each customer segment. Our extensive distribution network and wide range of quality products and services has enabled us to serve our customers effectively. However, we intend to further enhance value proposition to our customers by differentiating products and delivery channels based on the distinct needs of different customer segments.

 

Retail customers. We have segmented our retail customers into four groups: high net worth; mass affluent; middle class; and mass market. We believe we are relatively competitive in our core customer base, which includes mass affluent and middle class customers, and we serve these customers via our team of financial planners in our branches who sell customized higher margin services and products, such as investment advice, mutual funds, insurance, personal loans and securities brokerage services. For our mass market customers, we offer simple, easy-to-understand and relatively more standardized products such as basic deposit and lending products, including mortgage loans, and we encourage the use of alternative distribution channels such as the Internet, phone banking and ATMs by our mass market customers such that we can serve them in a cost efficient manner. We serve our high net worth individuals via branches and dedicated private banking centers staffed with experienced private bankers who offer sophisticated tailored financial services.

 

Corporate customers. We continuously and vigorously review our portfolio of corporate and small- and medium-sized enterprise customers to refine our database of core accounts and industries in terms of profitability potential. We seek to expand our relationship beyond a pure lending relationship by promoting our foreign exchange, factoring, trade finance and investment banking services to our core small- and medium-sized enterprise customers and cross-selling our investment banking services, derivatives and other risk hedging products, as well as employee retirement products to our core large corporate customers.

 

Diversify our revenue base with a view to reducing our exposure to interest rate cycles and increasing profitability. Currently, in line with the Korean banking industry, we derive a substantial majority of our revenues from our loan and other credit products. To reduce our traditional reliance on lending as a source of revenue and to increase our profitability, we have been seeking to further diversify our earnings base, in particular by focusing on fee-based services, such as foreign exchange, trade finance and derivatives products, investment banking and advisory investment trust services for our corporate customers and asset management and mutual funds, investment trust products and beneficiary certificates, life and non-life insurance products and securities brokerage services for our retail customers.

 

In addition, we intend to continue to enter into business alliances with other leading financial service providers so that we can offer a full range of “best of class” products and services to our targeted customers. We actively evaluate alliances and joint venture opportunities when they arise in order to diversify our revenue stream and provide our customers with a range of sophisticated and tailored products that will complement our

 

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existing products and services. We also intend to carefully consider potential acquisitions or other strategic investments that fit within our overall strategy. When considering acquisitions, we will focus on opportunities that (1) supplement the range of products and services we offer and strengthen our existing customer base; (2) enable us to maintain our standard for asset quality and profitability; and (3) provide us with a reasonable return on our investment.

 

Enhance operational efficiencies to further reduce costs. We have been seeking to improve our operational efficiency and reduce our expenses by integrating our businesses, unifying our business procedures, eliminating duplication, centralizing processes and procurement, implementing continuous automation and migrating to low cost distribution channels. We have standardized the risk management operations of Kyongnam Bank and Kwangju Bank with those of Woori Bank, with various upgrades to standardize the credit risk management and operational risk management systems of Kyongnam Bank and Kwangju Bank being completed in 2007.

 

We believe that the integration of our accounting system will allow us to further eliminate redundant functions and equipment and reducing our long-term expense. In addition, we are continuing our efforts to reduce procurement costs by coordinating and combining procurement activities among our subsidiaries. We believe the completion of the above integration, centralization and procurement projects together with our effort to encourage migration of our mass market customers to low-cost alternative channels will reduce our costs and enhance our operating efficiencies meaningfully.

 

Strengthen the performance of our management. We are also taking steps to concentrate the personnel management and performance-monitoring functions with respect to our subsidiaries at the holding company level. We believe such enhanced coordination and management will, in turn, improve our overall long-term operating performance by promoting: (1) more efficient deployment of human resources, based on prioritized strategic and operational objectives of the group as a whole; (2) more effective allocation of capital and management of liquidity at our holding company and subsidiaries; (3) greater flexibility to implement coordinated and timely operational changes in response to new market developments or changes in market conditions; and (4) the development of a uniform corporate culture, founded on the “Woori” corporate identity.

 

Corporate Banking

 

We provide commercial banking services to large corporate customers (including government-owned enterprises) and small- and medium-sized enterprises in Korea. Currently, our corporate banking operations consist mainly of lending to and taking deposits from our corporate customers. We also provide ancillary services on a fee basis, such as inter-account transfers, transfers of funds from branches and agencies of a company to its headquarters and transfers of funds from a company’s customer accounts to the company’s main account. We provide our corporate banking services predominantly through Woori Bank, although Kyongnam Bank and Kwangju Bank provide similar services to small- and medium-sized enterprises in their respective geographical regions.

 

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The following table sets forth the balances and percentages of our total lending and total deposits represented by our large corporate and small- and medium-sized enterprise customer loans and deposits, respectively, and the number of such customers as of the dates indicated:

 

     As of December 31,  
     2005     2006     2007  
     Amount    % of
Total
    Amount    % of
Total
    Amount    % of
Total
 
     (in billions of Won, except percentages)  

Loans:

               

Small- and medium-sized enterprise

   (Won) 43,691    42.0 %   (Won) 55,150    41.2 %   (Won) 68,077    42.6 %

Large corporate

     13,632    13.1       15,115    11.3       18,889    11.8  

Others (1)

     4,268    4.1       5,280    3.9       10,071    6.3  
                                       

Total

   (Won) 61,591    59.2 %   (Won) 75,545    56.4 %   (Won) 97,037    60.7 %
                                       

Deposits:

               

Small- and medium-sized enterprise

   (Won) 12,812    12.3 %   (Won) 18,900    14.9 %   (Won) 22,174    15.3 %

Large corporate

     24,249    23.2       34,626    27.4       45,461    31.3  
                                       

Total

   (Won) 37,061    35.5 %   (Won) 53,526    42.3 %   (Won) 67,635    46.6 %
                                       

Number of borrowers:

               

Small- and medium-sized enterprise

     189,052        172,759        171,040   

Large corporate

     1,097        924        1,037   

 

(1)

Includes loans to governmental agencies, foreign loans and other corporate loans.

 

Corporate loans we provide consist principally of the following:

 

   

working capital loans, which are loans used for general working capital purposes, typically with a maturity of one year or less, including notes discounted and trade finance; and

 

   

facilities loans, which are loans to finance the purchase of materials, equipment and facilities, typically with a maturity of three years or more.

 

On the deposit-taking side, we currently offer our corporate customers several types of corporate deposit products. These products can be divided into two general categories: demand deposits that have no restrictions on deposits or withdrawals, but which offer a relatively low interest rate; and time deposits from which withdrawals are restricted for a period of time, but offer higher interest rates. We also offer installment deposits, certificates of deposit and repurchase instruments. We offer varying interest rates on our deposit products depending upon the rate of return on our income-earning assets, average funding costs and interest rates offered by other nationwide commercial banks.

 

Small- and Medium-Sized Enterprise Banking

 

We use the term “small- and medium-sized enterprises” as defined in the Small and Medium Industry Basic Act of Korea and related regulations. Under the Small and Medium Industry Basic Act of Korea, the general criteria used to define small- and medium-sized enterprises is the number of full-time employees (less than 300), paid-in capital (not more than (Won)8 billion) or sales revenues (not more than (Won)30 billion), depending on the industry, but in each case the number of full-time employees must be fewer than 1,000, and the total amount of assets must be less than (Won)500 billion. The small- and medium-sized enterprise segment of the corporate banking market has grown significantly in recent years, including as a result of government measures to encourage lending to these enterprises. As a result of our efforts to target this growing market segment, our loan exposure to small- and medium-sized enterprises has increased from 65.9% of our total corporate loans as of December 31, 2002 to 70.2% as of December 31, 2007. As of December 31, 2007, 30.8% of our small- and medium-sized

 

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enterprise loans were extended to borrowers in the manufacturing industry, 13.4% were extended to borrowers in the retail and wholesale industry and 5.7% were extended to borrowers in the hotel and transportation industry.

 

We service our small- and medium-sized enterprise customers primarily through Woori Bank’s network of branches and small- and medium-sized enterprise relationship professionals, as well as through the branches and headquarters of Kyongnam Bank and Kwangju Bank. As of December 31, 2007, Woori Bank had stationed one or more relationship professionals at 659 branches, of which 472 were located in the Seoul metropolitan area. The relationship professionals specialize in servicing the banking needs of small- and medium-sized enterprise customers and concentrate their marketing efforts on developing new customers in this segment. As of December 31, 2007, Woori Bank had a total of 746 small- and medium-sized enterprise relationship professionals stationed at its branches.

 

In addition to increasing our dedicated staffing and branches, our strategy for this banking segment is to identify promising industry sectors and to develop and market products and services targeted towards customers in these sectors. We have also developed in-house industry specialists who can help us identify leading small- and medium-sized enterprises in, and develop products and marketing strategies for, these targeted industries. In addition, we operate customer loyalty programs at Woori Bank for our most profitable small- and medium-sized enterprise customers and provide them with benefits and services such as preferential rates, free seminars and workshops and complementary invitations to cultural events.

 

Industry-wide delinquency ratios for Won-denominated loans to small- and medium-sized enterprises rose from 2002 through 2004, although these delinquency ratios stabilized in 2005 and decreased in 2006 and 2007. As of December 31, 2006, the delinquency ratio for loans to small- and medium-sized enterprises was calculated as the ratio of (1) the outstanding balance of such loans in respect of which either principal payments are overdue by one day or more or interest payments are over due by 14 days or more (unless prior interest payments on a loan were made late on more than three occasions, in which case the loan is considered delinquent if interest payments are overdue by one day or more) to (2) the aggregate outstanding balance of such loans. From January 1, 2007, the delinquency ratio for small- and medium-sized enterprises is calculated as the ratio of (1) the outstanding balance of such loans in respect of which either principal or interest payments are over due by one month or more to (2) the aggregate outstanding balance of such loans. Our delinquency ratio for such loans denominated in Won on a Korean GAAP basis increased from 1.5% as of December 31, 2001 to 2.7% as of December 31, 2004, but decreased to 1.9% as of December 31, 2005, to 1.4% as of December 31, 2006 and further decreased under the new method of calculation to 0.9% as of December 31, 2007. On a Korean GAAP basis, we charged off (Won)157 billion of our Won-denominated loans to small- and medium-sized enterprises in 2007. See “Item 3D. Risk Factors—Risks relating to our corporate credit portfolio—The largest portion of our exposure is to small- and medium-sized enterprises, and financial difficulties experienced by companies in this segment may result in a deterioration of our asset quality and have an adverse impact on us.”

 

Lending Activities. We provide both working capital loans and facilities loans to our small- and medium-sized enterprise customers. As of December 31, 2007, working capital loans and facilities loans accounted for 75.9% and 18.4%, respectively, of our total small- and medium-sized enterprise loans. As of December 31, 2007, we had approximately 171,040 small- and medium-sized enterprise borrowers.

 

As of December 31, 2007, secured loans and loans guaranteed by a third party accounted for 55.0% and 18.6%, respectively, of our small- and medium-sized enterprise loans. As of December 31, 2007, approximately 64.9% of the secured loans were secured by real estate and 14.1% were secured by deposits. Working capital loans generally have a maturity of one year, but may be extended on an annual basis for an aggregate term of three to five years if periodic payments are made. Facilities loans have a maximum maturity of ten years.

 

When evaluating the extension of working capital loans and facilities loans, we review the creditworthiness and capability to generate cash of the small- and medium-sized enterprise customer. Furthermore, we take corporate guarantees and credit guarantee letters from other financial institutions and use deposits that the

 

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borrower has with us or securities pledged to us as collateral. We receive fees in relation to credit evaluation, collateral appraisal and other services provided in connection with a loan extension.

 

The value of any collateral is defined using a formula that takes into account the appraised value of the property, any prior liens or other claims against the property and an adjustment factor based on a number of considerations including, with respect to property, the value of any nearby property sold in a court-supervised auction during the previous five years. We generally revalue any collateral on a periodic basis (every two years for real estate, every year for equipment, every month for unlisted stocks and deposits and every week for stocks listed on a major Korean stock exchange) or if a trigger event occurs with respect to the loan in question.

 

Pricing. We establish the pricing for our small- and medium-sized enterprise loan products based principally on transaction risk, our cost of funding and market considerations. At Woori Bank, lending rates are generally determined using our automated CREPIA system. At Kyongnam Bank and Kwangju Bank, we began to determine lending rates using similar credit evaluation systems from January 2008. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Credit Risk Management—Credit Evaluation and Approval.” We measure transaction risk using factors such as the credit rating assigned to a particular borrower and the value and type of collateral. Our system also takes into account cost factors such as the current market interest rate, opportunity cost and cost of capital, as well as a spread calculated to achieve a target rate of return. Depending on the price and other terms set by competing banks for similar borrowers, we may reduce the interest rate we charge to compete more effectively with other banks. Loan officers have limited discretion in deciding what interest rates to offer, and significant variations require review at higher levels. As of December 31, 2007, about 70% of our small- and medium-sized enterprise loans had interest rates that varied with reference to current market interest rates.

 

Large Corporate Banking

 

Our large corporate customers consist of companies that are not “small- and medium-size enterprises” as defined in the Small and Medium Industry Basic Act of Korea and related regulations, and typically include companies that have assets of (Won)7 billion or more and are therefore subject to external audit under the External Audit Act of Korea. As a result of our history and development, particularly the history of Woori Bank, we remain the main creditor bank to many of Korea’s largest corporate borrowers.

 

In terms of our outstanding loan balance, as of December 31, 2007, 53.5% of our large corporate loans were extended to borrowers in the manufacturing industry, 8.6% were extended to borrowers in the retail and wholesale industry and 6.0% were extended to borrowers in the hotel and transportation industry.

 

We service our large corporate customers primarily through Woori Bank’s network of dedicated corporate marketing centers and relationship managers. Woori Bank operates 13 dedicated corporate marketing centers, 12 of which are located in the Seoul metropolitan area. Each center is staffed with several relationship managers and headed by a senior relationship manager. Depending on the center, each relationship manager is responsible for large corporate customers that either are affiliates of a particular chaebol or operate in a particular industry or region. As of December 31, 2007, Woori Bank had a total of 94 relationship managers who focus on marketing to and managing the accounts of large corporate customers.

 

Our strategy for the large corporate banking segment is to develop new products and cross-sell our existing products and services to our core base of large corporate customers. In particular, we have been focusing on marketing fee-based products and services such as foreign exchange and trade finance services, derivatives and other risk hedging products, investment banking services and advisory services. We have also been reviewing the credit and risk profiles of our existing customers as well as those of our competitors, with a view to identifying a target group of high-quality customers on whom we can concentrate our marketing efforts. In addition, we are seeking to increase the chaebol-, region- and industry-based specialization of our relationship managers, including through the operation of a knowledge management database that allows greater sharing of marketing techniques and skills.

 

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Lending Activities. We provide both working capital loans and facilities loans to our large corporate customers. As of December 31, 2007, working capital loans and facilities loans accounted for 38.6% and 8.1%, respectively, of our total large corporate loans.

 

Loans to large corporate customers may be secured by real estate or deposits or be unsecured. As of December 31, 2007, secured loans and loans guaranteed by a third party accounted for 21.5% and 3.5%, respectively, of our large corporate loans. Since a relatively low percentage of our large corporate loan portfolio is secured by collateral, we may be required to establish larger allowances for loan losses with respect to any such loans that become non-performing or impaired. See “—Assets and Liabilities—Asset Quality of Loans—Loan Loss Provisioning Policy.” As of December 31, 2007, approximately 57.7% of the secured loans were secured by real estate and approximately 3.9% were secured by deposits. Working capital loans generally have a maturity of one year but may be extended on an annual basis for an aggregate term of three to five years. Facilities loans have a maximum maturity of ten years.

 

We evaluate creditworthiness and collateral for our loans to corporate customers in essentially the same way as we do for loans to small- and medium-sized enterprise customers. See “—Corporate Banking—Small- and Medium-Sized Enterprise Banking—Lending Activities.”

 

Pricing. We determine the pricing of our loans to corporate customers in the same way that we determine the pricing of our loans to small- and medium-sized enterprise customers. See “—Corporate Banking—Small- and Medium-Sized Enterprise Banking—Pricing.” As of December 31, 2007, about one-third of these loans had interest rates that varied with reference to current market interest rates.

 

Consumer Banking

 

We provide retail banking services to consumers in Korea. Our consumer banking operations consist mainly of lending to and taking deposits from our retail customers. We also provide ancillary services on a fee basis, such as wire transfers. While we have historically attracted and held large amounts of consumer deposits through our extensive branch network, our substantial consumer lending growth occurred principally in recent years, in line with the increase in the overall level of consumer debt in Korea. We provide our consumer banking services primarily through Woori Bank, although we service a significant portion of our regional retail banking customers through Kyongnam Bank and Kwangju Bank. See “—Branch Network and Other Distribution Channels.”

 

Woori Bank classifies its consumer banking customers based on their individual net worth and contribution to our consumer banking operations, into four groups: high net worth; mass affluent; middle class; and mass market. We differentiate our products, services and service delivery channels with respect to these segments and target our marketing and cross-selling efforts based on this segmentation. With respect to the high net worth and mass affluent segments, we have established private banking operations to better service customers in these segments. See “—Private Banking Operations.” With respect to the middle class segment, we intend to use our branch-level sales staff to maximize the overall volume of products and services we provide. With respect to the mass market segment, we have focused on increasing our operating efficiency by encouraging customers to migrate to low-cost alternative service delivery channels, such as the Internet, call centers, mobile banking and ATMs. Kyongnam Bank and Kwangju Bank have segmented their customers into similar groups.

 

Kyongnam Bank and Kwangju Bank, both regional banks established in their respective regions in 1970 and 1968, are using region-focused strategies to attract customers, market products and create more intimate customer relationships, thereby differentiating themselves from nationwide banks in the same market. Kyongnam Bank is attempting to increase priority customer transaction volume by actively increasing its customer service and management and differentiating services for these customers. Kwangju Bank operates a customer management system that uses diverse strategies to market differentiated products and services to priority customers.

 

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Lending Activities

 

We offer a variety of consumer loan products to households and individuals. We differentiate our product offerings based on a number of factors, including the customer’s age group, the purpose for which the loan is used, collateral requirements and maturity. The following table sets forth the balances and percentage of our total lending represented by our consumer loans as of the dates indicated:

 

     As of December 31,  
     2005     2006     2007  
     Amount    % of
Total Loans
    Amount    % of
Total Loans
    Amount    % of
Total Loans
 
     (in billions of Won, except percentage)  

General purpose household loans

   (Won) 20,183    19.4 %   (Won) 28,117    21.0 %   (Won) 30,967    19.3 %

Mortgage and home equity loans

     20,181    19.4       27,588    20.6       28,556    17.9  
                                       

Total

   (Won) 40,364    38.8 %   (Won) 55,705    41.6 %   (Won) 59,523    37.2 %
                                       

 

Our consumer loans consist of:

 

   

general purpose household loans, which are loans made to customers for any purpose (other than mortgage and home equity loans), and include overdraft loans, which are loans extended to customers to cover insufficient funds when they withdraw funds from their demand deposit accounts with us in excess of the amount in such accounts up to a limit established by us; and

 

   

mortgage loans, which are loans made to customers to finance home purchases, construction, improvements or rentals, and home equity loans, which are loans made to customers secured by their homes to ensure loan repayment.

 

For secured loans, including mortgage and home equity loans, we generally lend up to 60% of the collateral value (except in areas of high speculation designated by the government where we are required to limit our lending to 40% of the appraised value of collateral) minus the value of any lien or other security interest that is prior to our security interest. In calculating the collateral value for real estate, we generally use the appraisal value of the collateral as determined using our automated CREPIA system and similar systems used by Kyongnam Bank and Kwangju Bank. We generally revalue collateral on a periodic basis. As of December 31, 2007, the revaluation period was every year for real estate (with apartments being revalued every month), every year for equipment, every month for deposits and every week for stocks listed on a major Korean stock exchange.

 

A borrower’s eligibility for general purpose household loans is primarily determined by such borrower’s creditworthiness. In reviewing a potential borrower’s loan application, we also consider the suitability of the borrower’s proposed use of funds, as well as the borrower’s ability to provide a first-priority mortgage. A borrower’s eligibility for a home equity loan is primarily determined by such borrower’s creditworthiness (including as determined by our internal credit scoring protocols) and the value of the collateral property, as well as any third party guarantees of the borrowed amounts.

 

In light of concerns regarding the potential risks of excessive consumer lending, particularly mortgage and home equity lending, as well as to stabilize the real estate market in Korea, the Korean government has recently adopted more stringent regulations with respect to consumer lending by Korean banks. See “Item 3D. Risk Factors—Risks relating to government regulation and policy—Government regulation of consumer lending, particularly mortgage and home equity lending, has recently become more stringent, which may hurt our consumer banking operations” and “—Supervision and Regulation—Principal Regulations Applicable to Banks—Recent Regulations Relating to Retail Household Loans.”

 

We also offer a variety of collective housing loans, including loans to purchase property or finance the construction of housing units, loans to contractors to be used for working capital purposes, and loans to

 

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educational institutions and non-profit entities to finance the construction of dormitories. Collective housing loans subject us to the risk that the housing units will not be sold. As a result, we review the probability of the sale of the housing unit when evaluating the extension of a loan. We also review the borrower’s creditworthiness and the suitability of the borrower’s proposed use of funds. Furthermore, we take a lien on the land on which the housing unit is to be constructed as collateral. If the collateral is not sufficient to cover the loan, we also take a guarantee from the Housing Finance Credit Guarantee Fund as security.

 

General Purpose Household Loans

 

Our general purpose household loans may be secured by real estate (other than homes), deposits or securities. As of December 31, 2007, approximately (Won)21,360 billion, or 69.2% of our general purpose household loans were unsecured, although some of these loans were guaranteed by a third party. Overdraft loans are primarily unsecured and typically have a maturity between one and three years, and the amount of such loans has been steadily declining. As of December 31, 2007, this amount was approximately (Won)4 billion.

 

Pricing. The interest rates on our consumer loans are either a periodic floating rate (which is based on a base rate determined for three-month, six-month or twelve-month periods derived internally, which reflects our internal cost of funding, further adjusted to account for the borrower’s credit score and our opportunity cost) or a fixed rate that reflects those same costs and expenses, but taking into account interest rate risks. Our interest rates also incorporate a margin based on, among other things, the type of collateral (if any), priority with respect to any security, our target loan-to-value ratio and loan duration. We also can adjust the applicable rate based on current or expected profit contribution of the customer. At Woori Bank, lending rates are generally determined by our automated CREPIA system, and we began to determine lending rates at Kyongnam Bank and Kwangju Bank using similar credit evaluation systems from January 2008. The applicable interest rate is determined at the time of the loan. We also charge a termination fee in the event a borrower repays the loan prior to maturity. As of December 31, 2007, approximately 94.0% of our general purpose household loans had floating interest rates.

 

Mortgage and Home Equity Lending

 

We provide customers with a number of mortgage and home equity loan products that have flexible features, including terms, repayment schedules, amounts and eligibility for loans. The maximum term of our mortgage and home equity loans is typically 30 years for Woori Bank, Kyongnam Bank and Kwangju Bank. Most of our mortgage and home equity loans have an interest-only payment period of three years or less. With respect to these loans, we determine the eligibility of borrowers based on the borrower’s personal information, transaction history and credit history using Woori Bank’s CREPIA system and similar systems used by Kyongnam Bank and Kwangju Bank. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Credit Risk Management—Credit Evaluation and Approval.” The eligibility of a borrower that is participating in a housing lottery will depend on proof that it has paid a deposit or can obtain a guarantee from a Korean government-related housing fund. We receive fee income related to the origination of loans, including fees relating to loan processing and collateral evaluation.

 

As of December 31, 2007, approximately 92.8% of our mortgage and home equity loans were secured by residential or other property, 1.6% of our mortgage and home equity loans were guaranteed by the government housing-related funds and 4.0% of our mortgage and home equity loans, contrary to general practices in the United States, were unsecured (although the use of proceeds from mortgage and home equity loans is restricted for the purpose of financing home purchases and some of these loans were guaranteed by a third party). One reason that a portion of our mortgage and home equity loans are unsecured is that we, along with other Korean banks, provide advance loans to borrowers for the down payment of new housing (particularly apartments) that is in the process of being built. Once construction is completed, which may take several years, these mortgage and home equity loans become secured by the new housing purchased by these borrowers. As of December 31, 2007, we had issued unsecured construction loans relating to housing where construction was not completed in the amount of (Won)1,135 billion. For the year ended December 31, 2007, the average initial loan-to-value ratio of our mortgage and home equity loans was approximately 47.8%, compared to 53.1% for the year ended December 31, 2006.

 

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Pricing. The interest rates for our mortgage and home equity loans are determined on essentially the same basis as our general purpose household loans, except that for mortgage and home equity loans we place significantly greater weight on the value of any collateral that is being provided to secure the loan. The base rate we use in determining the interest rate for our mortgage and home equity loans is identical to the base rate we use to determine pricing for our general purpose household loans. As of December 31, 2007, approximately 94.7% of our outstanding mortgage and home equity loans had floating interest rates.

 

Private Banking Operations

 

In 2002, we launched our private banking operations within Woori Bank, Kyongnam Bank and Kwangju Bank. These operations currently aim to service our high net worth and mass affluent retail customers who individually maintain a deposit balance of at least (Won)30 million with us. As of December 31, 2007, we had over 392,583 customers who qualified for private banking services, representing 2.1% of our total retail customer base. Of our total retail customer deposits of (Won)51,301 billion as of December 31, 2007, high net worth and mass affluent customers accounted for 78.9%.

 

Through our private bankers, we provide financial and real estate advisory services to our high net worth and mass affluent customers. We also market differentiated investment and banking products and services to these segments, including beneficiary certificates, overseas mutual fund products, specialized bank accounts and credit cards. In addition, we have developed a customer loyalty program for our private banking customers that provides preferential rate and fee benefits and awards. We have also segmented our private banking operations by introducing exclusive private client services for high net worth customers who individually maintain a deposit balance of at least (Won)1 billion with us. We believe that our private banking operations will allow us to increase our revenues from our existing high net worth and mass affluent customers, as well as attract new customers in these segments.

 

Woori Bank has 460 branches that offer private banking services. These branches are staffed by 507 private bankers and almost all of the branches are located in metropolitan areas, including Seoul. Kyongnam Bank and Kwangju Bank operate one and two dedicated private banking centers, respectively. Both banks also offer private banking services through a select number of branches. As of December 31, 2007, 79 private bankers were dispersed over 78 Kyongnam Bank branches and 47 private bankers were dispersed over 46 Kwangju Bank branches that provided private banking services.

 

We operate three “financial products department stores” in Seoul, which function as regular branches and through which we offer and market a variety of financial products and services, including credit cards, foreign currency products, bonds, stocks and insurance policies. These “department stores” employ 11 specialists in the areas of tax, real estate and fund products. They are also dedicated to offering comprehensive wealth management consulting services for high net worth customers. In addition, Woori Bank operates an advisory center in Seoul for its private banking clients, which employs 20 specialists advising on matters of law, tax, real estate, risk assessment and investments.

 

Deposit-Taking Activities

 

As of December 31, 2007, we were the second-largest deposit holder on a combined basis (not adjusted for overlap) among Korean banks, in large part due to our nation-wide branch network. The balance of our deposits from retail customers was (Won)51,173 billion, (Won)49,830 billion, and (Won)51,301 billion as of December 31, 2005, 2006 and 2007, respectively, which constituted 49.1%, 39.4% and 35.4%, respectively, of the balance of our total deposits.

 

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We offer diversified deposit products that target different customers with different needs and characteristics. These deposit products fall into five general categories:

 

   

time deposits, which generally require a customer to maintain a deposit for a fixed term during which interest accrues at a fixed or floating rate. Early withdrawals require penalty payments. The term for time deposits typically ranges from one month to five years;

 

   

demand deposits, which either do not accrue interest or accrue interest at a lower rate than time, installment or savings deposits. The customer may deposit and withdraw funds at any time and, if the deposits are interest-bearing, they accrue interest at a fixed or variable rate depending on the period and/or amount of deposit;

 

   

savings deposits, which allow the customer to deposit and withdraw funds at any time and accrue interest at a fixed rate set by us depending upon the period and amount of deposit;

 

   

installment deposits, which generally require the customer to make periodic deposits of a fixed amount over a fixed term during which interest accrues at a fixed rate. Early withdrawals require penalty payment. The term for installment deposits range from six months to ten years; and

 

   

certificates of deposit, the maturities of which range from 30 days to five years, with a required minimum deposit of (Won)10 million. Interest rates on certificates of deposit vary with the length of deposit and prevailing market rates. Certificates of deposit may be sold at face value or at a discount with the face amount payable at maturity.

 

The following table sets forth the percentage of our total retail and corporate deposits represented by each deposit product category as of December 31, 2007:

 

Time Deposits

   Demand Deposits     Savings Deposits     Installment Deposits     Certificates of Deposit  

53.67%

   20.48 %   10.59 %   0.28 %   14.98 %

 

We offer varying interest rates on our deposit products depending on market interest rates as reflected in average funding costs, the rate of return on our interest-earning assets and the interest rates offered by other commercial banks. Generally, the interest payable is the highest on installment deposits and decreases with certificate of deposit accounts and time deposits and savings deposit accounts receiving relatively less interest, and demand deposits accruing little or no interest.

 

We also offer deposits in foreign currencies and various specialized deposits products, including:

 

   

Apartment application time deposits, which are special purpose time deposit accounts providing the holder with a preferential right to subscribe for new private apartment units under the Housing Act. This law sets forth various measures supporting the purchase of houses and the supply of such houses by construction companies. These products accrue interest at a fixed rate for one year, and at an adjustable rate after one year. Deposit amounts per account range from (Won)2 million to (Won)15 million depending on the size and location of the dwelling unit. These deposit products target high and middle income households.

 

   

Apartment application installment savings deposits, which are monthly installment savings programs providing the holder with a preferential right to subscribe for new private apartment units under the Housing Act. These deposits require monthly installments of (Won)50,000 to (Won)500,000, have maturities of between three and five years and accrue interest at fixed or variable rates depending on the term.

 

   

Apartment application savings accounts deposits, which are monthly installment savings programs providing the holder with a preferential right to subscribe for new national housing units constructed under the Housing Act or mid-sized, privately constructed national housing units. These deposits are available only to heads of household who do not own a home. These deposits require monthly installments of (Won)20,000 to (Won)100,000, terminate when the holder is selected as a subscriber for a housing unit and accrue interest at fixed rates.

 

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The Monetary Policy Committee of the Bank of Korea imposes a reserve requirement on Won currency deposits of commercial banks based generally on the type of deposit instrument. The reserve requirement is currently up to 7%. See “—Supervision and Regulation—Principal Regulations Applicable to Banks—Liquidity.” Ongoing regulatory reforms have removed all controls on lending rates and deposit rates (except for the prohibition on interest payments on current account deposits).

 

The Depositor Protection Act provides for a deposit insurance system where the KDIC guarantees to depositors the repayment of their eligible bank deposits. The deposit insurance system insures up to a total of (Won)50 million per depositor per bank. See “—Supervision and Regulation—Principal Regulations Applicable to Banks—Deposit Insurance System.” We pay an annual premium of 0.2% of our average deposits and, for the year ended December 31, 2007, our banking subsidiaries paid an aggregate of (Won)149 billion.

 

Branch Network and Other Distribution Channels

 

Our commercial banking subsidiaries had a total of 1,144 branches in Korea as of December 31, 2007, which on a combined basis, was the second-most extensive network of branches among Korean commercial banks. Recently, demand for mutual funds and other asset management products as well as bancassurance products have been rising. These products require extensive sales force and customer interaction to sell, further emphasizing the need for an extensive branch network. As a result, an extensive branch network is important to attracting and maintaining retail customers, as they generally conduct most of their transactions through bank branches. We believe that our extensive branch network in Korea helps us to maintain our retail customer base, which in turn provides us with a stable and relatively low cost funding source.

 

The following table presents the geographical distribution of our branch network in Korea as of December 31, 2007:

 

     Woori Bank     Kyongnam Bank     Kwangju Bank     Total  
     Number    % of
Total
    Number    % of
Total
    Number    % of
Total
    Number    % of
Total
 

Area

                    

Seoul

   434    50.0 %   3    2.0 %   4    3.1 %   441    38.6 %

Six largest cities (other than Seoul)

   154    17.7     46    31.3     84    65.6     284    24.8  

Other

   281    32.3     98    66.7     40    31.3     419    36.6  
                                            

Total

   869    100.0 %   147    100.0 %   128    100.0 %   1,144    100.0 %
                                            

 

Our Woori Bank branches are concentrated in the Seoul metropolitan area, while our Kyongnam Bank and Kwangju Bank branches are located mostly in the southeastern and southwestern regions of Korea, respectively, providing extensive overall nationwide coverage.

 

In order to maximize access to our products and services, we have established an extensive network of ATMs and cash dispensers, which are located in branches as well as unmanned outlets. The following table presents the number of ATMs and cash dispensers we had as of December 31, 2007:

 

     ATMs    Cash
Dispensers

Woori Bank

   3,711    3,041

Kyongnam Bank

   478    469

Kwangju Bank

   327    390
         

Total

   4,516    3,900
         

 

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We also actively promote the use of alternative service delivery channels in order to provide convenient service to customers. We also benefit from customers’ increasing use of these outlets, as they allow us to maximize the marketing and sales functions at the branch level, reduce employee costs and improve profitability. The following tables set forth information, for the periods indicated, relating to the number of transactions and the fee revenue of our alternative service delivery channels with respect to Woori Bank, Kyongnam Bank and Kwangju Bank.

 

Woori Bank

 

     For the year ended December 31,
     2005    2006    2007

ATMs (1):

        

Number of transactions (millions)

     333      369      398

Fee income (billions of Won)

   (Won) 34    (Won) 39    (Won) 34

Telephone banking:

        

Number of users

     4,131,770      4,675,000      5,186,812

Number of transactions (millions)

     118      118      118

Fee income (billions of Won)

   (Won) 14    (Won) 9    (Won) 5

Internet banking:

        

Number of users

     2,793,322      4,331,780      6,339,416

Number of transactions (millions)

     915      1,368      2,068

Fee income (billions of Won)

   (Won) 63    (Won) 58    (Won) 70

 

Kyongnam Bank

 

     For the year ended December 31,
     2005    2006    2007

ATMs (1):

        

Number of transactions (millions)

     53      59      68

Fee income (billions of Won)

   (Won) 2    (Won) 2    (Won) 8

Telephone banking:

        

Number of users

     568,804      621,807      792,416

Number of transactions (millions)

     22      23      20

Fee income (billions of Won)

   (Won) 2    (Won) 2    (Won) 2

Internet banking:

        

Number of users

     275,875      352,934      528,177

Number of transactions (millions)

     52      69      61

Fee income (billions of Won)

   (Won) 1    (Won) 1    (Won) 1

 

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Kwangju Bank

 

     For the year ended December 31,
     2005    2006    2007

ATMs (1):

        

Number of transactions (millions)

     39      63      75

Fee income (billions of Won)

   (Won) 7    (Won) 7    (Won) 7

Telephone banking:

        

Number of users

     479,969      530,336      582,098

Number of transactions (millions)

     18      17      17

Fee income (billions of Won)

   (Won) 2    (Won) 2    (Won) 1

Internet banking:

        

Number of users

     444,395      517,022      573,029

Number of transactions (millions)

     36      61      87

Fee income (billions of Won)

   (Won) 1    (Won) 1    (Won) 1

 

(1)