Smart & Profitable Growth
ANNUAL REPORT 2005

Contents
01 Profile
05 Financial Highlights
06 Message from the Chairman
08 Message from the CEO
10 Review of Operations
24 Financial Section
145 Organization Chart
146 Board of Directors & Managing Directors
147 Global Directory
148 Overseas Network & Domestic Network

Profile
Beyond our Numbers
Established in 1967 as a government-owned banking institution specializing in foreign exchange andinternational trade financing, Korea Exchange Bank (KEB) has developed a dominant position in these fields.
KEB was privatized in 1989, and has since continued to solidify its standing as one of the country’s premierecommercial banks. Today, we are the Korea’s leading international bank with a demonstrated track record ofcorporate finance expertise.
Like other domestic banks, KEB was confronted with the dual threats posed by the collapse of large
corporation following the Asian financial crisis as well the bursting of the consumer credit card bubble.
Unlike many other domestic banks, KEB survived without government rescue or bailout using public money.
With the new capital from our major shareholder, Lone Star Funds, and a new spirit, the men and women of
KEB have managed successful turnaround. The platform for quality profit growth was built in 2004.
In 2005, KEB has advanced one step further. KEB proved itself to be a healthy and strong institution, withprofitability and capital adequacy at the highest levels in our history. Portfolio quality is in the best shape in our
history. By intensifying our unique franchise strengths and our emphasis on the quality of our business, KEB
will continue “Smart & Profitable” growth.

Net Income Exceeding(KRW)

1,929.3

13.68%Net Income

BIS Capital Ratio(KRW Billions)

(%)

2.59%

NPL Ratio

9.47%
9.32%

(%)

1.82%

522.1

0.90%

-213.8@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@0

03

04

05

03

04

05

03

04

05

Financial Highlights(In Billions of Korean Won, %)2005-12

2004-12

YoY

72,719.8
43,475.5
27,463.7
13,598.8
2,413.0

67,167.7
41,529.0
26,598.1
12,156.4
2,774.5

+8.3%
+4.7%
+3.3%
+11.9%
13.0%

Substandard & Below Ratio
Delinquency Ratio

0.90%
0.93%

1.82%
1.78%

0.92%p
0.85%pTotal Deposit
Total Shareholders’ Equity
Paid-In Capital

44,245.6
5,657.7
3,224.5

43,765.6
2,929.4
3,224.5+1.1%+93.1%-BIS Capital Ratio(Tier 1 Ratio)

13.68%
9.65%

9.47%
5.41%

+4.21%p+4.24%p

Income Statement
Net Interest Margin
Income Before Provision
Net Income

3.23%
1,858.5
1,929.3

2.41%
1,445.1
522.1+0.82%p+28.6%+269.5%Return On Asset (ROA)
Return On Equity (ROE)

3.05%
43.97%

0.81%
19.43%+2.24%p+24.54%p

Balance Sheet
Total Asset
Total Credit
Corporate
Household
Credit Card

MESSAGE FROM THE CHAIRMAN

Distinguished Shareholders,
By almost any measure, the performance of your bank this year was excellent. Korea
Exchange Bank’s performance in 2005 built on strong momentum from its 2004
turnaround to produce a record KRW 1.9 trillion in net income. Moreover, key measuresof capital strength and credit quality were also at record levels, the best among Koreanbanks, and the best in KEB’s history.
But the KEB story is more than simply numbers. It is one of loyalty, quality and pride:
Loyalty of clients, quality of staff and pride in performance. Through the 1990’s, KEB was
Korea’s leading private sector bank. The bank boasted an extensive blue-chip corporateclient base coupled with a broad network of vigorous SME clients, an upscale retailbanking business, the first credit card in Korea, the largest international branch networkand leading market shares in foreign exchange and trade finance.
The Asian financial crisis was a considerable set-back, not only to KEB but to the Korean
financial sector as a whole. These were difficult times and in the midst of an IMF rescue,
19 major banks either received government bailouts or were consolidated down to the six
major competitors that KEB faces today.
But KEB was unique in that its sophistication helped the bank to attract foreign capitalsufficient to replenish its financial strength and undertake the reorganization andstructural transformation that has restored the bank to the financial and operating
strength it enjoys today.
Throughout the restructuring, the KEB staff never relinquished their pride in the bank.
The KEB clients - retail, corporate and card - never relinquished their loyalty to the bank.
And the quality of the KEB staff - experienced, multi-lingual and hard-working - neverfaltered. That quality is more than evident today. KEB has returned to the leadership
position it enjoyed historically. As we like to say within our bank, “We are not the biggest,
but the best.”
This year I have had the opportunity to visit many of our branch staff throughout Korea
and internationally, to meet with many corporate and private clients, as well as represent
KEB at key supranational meetings. The feedback has been quite encouraging. KEB’s
return to strength has not gone unnoticed.
There are many examples of KEB leadership beyond its core competencies ininternational banking, foreign exchange, trade and corporate finance. In 2005, as theleading creditor of Hynix Semiconductor, KEB orchestrated the largest and mostsuccessful corporate financial restructuring ever in Asia. In electronic settlement, KEB
helped inaugurate the Korean launch of CLS Bank and achieved an incredible 90%
market share. In corporate social responsibility, KEB set up the KEB Foundation, thefirst-ever charitable foundation to be established by a Korean financial institution. The
KEB Foundation is dedicated to charitable giving and volunteer activity as a means to help
those less fortunate in our society. And our foundation is committed to conduct its affairs
in a professional, transparent and ethical manner that will serve as a model for others tofollow.

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We have executed this turnaround and restored our competitiveness so that the bank andthe staff could face an uncertain future with confidence and from a position of strength.
That future is now becoming clarified. At the time of this report, we learned that theforeign capital of KEB, represented by Lone Star Funds and Commerzbank, intends tosell their shareholdings, and that Kookmin Bank had been selected as the buyer. This isa difficult outcome for KEB staff who are proud of their independent heritage and thesuccessful turnaround they have achieved. However, a merger between KEB andKookmin Bank, unlike other mergers in Korea, would be a combination of two strong
banks with complementary strengths. Properly executed, it could produce a Korean bankof scale and sophistication on a par with the world’s leading banks.
Your bank’s laudable performance in 2005 is result of a combination of the leadership of
KEB of the past and the strengths of KEB of today. It is a potent combination that, whencoupled with the strengths of Kookmin Bank could produce and even more successfulbank... not only the biggest and the best in Korea, but one of the world’s leading global
financial institutions.
As shareholders, I thank you for your loyalty and support. To the men and women of KEB,
I extend my sincere appreciation for the dedication and effort that made possible ourrecord performance this year. As your Chairman, I have enjoyed the loyalty and respectof the KEB staff, and I take great pride in their accomplishment.

Robert E. Fallon
ChairmanMESSAGE FROM THE CEO

Dear Shareholders,
It is my great honor to report to you on the progress your bank has made during 2005 to
improve our business performance, strengthen our competitive position, and build asound and healthy institution.
The men and women of KEB delivered a very strong performance in 2005. We enter 2006
with the best asset quality in our history, with the best capital levels in our history, andwith the highest profitability in our history.
The bank delivered record net income of over W1.9 trillion. We achieved both of ourincome goals: the continuous improvement of our ongoing operating results, and therealization of significant gains through the monetization of our large portfolio of special
and non-performing assets.
With this strong financial performance we accelerated the restoration of our capital base,achieving a total BIS ratio of 13.68%, our strongest level ever and the strongest of the
major Korean banks. We eliminated a key competitive disadvantage that has limited thebank’s business prospects and growth for most of the past decade.
Through disciplined business execution in an improving market, we dramatically improved
the quality of our credit portfolio, with Non-Performing Loans at just 0.90%. This again
represents the best level in our history and the lowest level among Korean banks. New
delinquency formation was down more than 1.0% as we left 2005 versus 2004 levels. Our
credit card portfolio is now healthy.
Our bank is more profitable, less risky, and strongly capitalized. The international rating
agencies have responded with upgrades to our credit and financial strength ratings.
We’ve shown the success of our clear strategy to be “not the biggest, but the best”. I
congratulate KEB’s hardworking and creative staff for these accomplishments, and I
thank all of KEB’s shareholders for your continued support.
Investing in our capability
With our strong performance and financial health restored, KEB invested in improving ourbusiness capability.
We completed the implementation of our “Next Generation Banking System” and other IT
upgrades to improve reliability, deliver productivity for our staff, and speed our ability tointroduce new products.
We dramatically upgraded our branch network with the most ambitious branch renovation
program in our history, affecting more than 80 branches, some of which had not been
upgraded since the early 1990s. We opened and relocated 15 branches and 5 new Card
Centers in new market areas with promising growth prospects. More will come in 2006.
Our new “marketing layout” very effectively provides the proper environment for today’s
business model… significantly expanded emphasis on customer consultation and advisory
instead of traditional transaction processing.

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As each of our business units focuses on the specific customer segments where KEB canoutperform, we are committing the resources to develop new products and business tools
so our staff can win. In our Retail Bank, we invested in new Wealth Management Centersfor our Private Banking business; we introduced our new Wealth Management System, acomprehensive financial planning and advisory tool to raise the expertise andeffectiveness of our bankers in advising their clients; we established a new Investment
Products team to ensure that KEB can offer the best performing products to ourcustomers from which ever fund manager we choose.

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Investing in our staff

The path forward

KEB also invested in our staff. We have increased our training,
more than doubling the level of 2004, and extended the training toour full-time teller staff. We completely renovated our company
training center – including classrooms, teaching equipment, living
and recreational facilities – as part of our commitment to theongoing development of our staff. Newly named the “KEB Rose
Academy”, the facility includes a fully functional “model branch”
to provide a real-life training environment.

We will build on the strong momentum of the past year, and plan
to once again deliver more than 1 trillion won in net income in2006. Our competitors are strong and challenging us every day
and every transaction, but KEB has no shortage of opportunities
for continued improvement. With our financial health and capital
restored, our focus is on achieving “Smart & Profitable Growth”.

We are hiring again – more than 150 people in 2005 – so that we
can ensure a flow of great new talent into the company andreward our best-performing contract staff. KEB’s “Open Hiring”
approach – focused on hiring the best, most talented candidates
regardless of educational pedigree – sparked a revolutionary
trend in our society. We had more than 10,000 applicants for ourjobs. For KEB it was simply an extension of our philosophy tocreate a strong, merit-based environment for the better
development of our bank.
And we improved the compensation system for our staff.
Importantly, in the 2005 Collective Bargaining the bank restored
the welfare pension that the staff sacrificed several years ago andwhich was a key missing element for our staff compared to ourpeers. Earlier in the year the bank instituted a very uniquedeferred bonus scheme for all staff – the “KEB Rose Bonus” –with the value linked to the financial performance of the bank and
KEB’s share price.
Our staff are benefiting from their hard work and theimprovement in the bank’s performance.
Investing in our communities
We are proud of the leadership KEB has shown in our community
service and volunteerism. Each of our marketing regions has
adopted worthy local community charities or causes to support on
an ongoing basis. In addition to the bank’s monetarycontributions, the staff contributes their time and capabilities tohelp those in need in the communities where we do business.
These efforts are good for our communities, good for our public
reputation, and good for our pride in ourselves and KEB.
In December 2005, we established the KEB Foundation, the firstcharitable foundation of its kind in the Korean banking industry.
With a Board of Directors consisting of outstanding leaders in oursociety, the KEB Foundation will ensure that our spirit of giving
has a permanent focus and source of funding.
KEB will continue to be a leader in social responsibility.

The key test for our businesses will be to become much morecustomer-focused. In each of our Banks – Global Corporate,
Retail, and Card – we have strong, defendable, and profitable
positions. We will drive our customer segmentation efforts sothat we deliver the “right products to the right customers”.
With better customer-focused marketing strategies and productofferings, we will work to raise our business promotion
excellence. Improvements in training, sales processes, and tools– along with continuous elimination of administrative work – willallow our branch network to focus more exclusively on marketing
and advising our customers.
No company can ever lose sight of productivity and efficiency,
and KEB will be diligent both in the use of our capital and use of
our people. We will maintain our cost discipline, and we will
improve our ability to allocate capital to the best opportunities.
To continue to create a better environment for our staff toperform their best, we will continue to focus on high standards ofcompliance and ethics, and expand the implementation of ourglobal standard HR practices.
We face uncertainty in the future change of our major
shareholder, but that also brings the prospect of clarity andstability in the bank’s ownership structure. The men and womenof KEB are focused on our performance and capability, and weare proud that our efforts have again made us an attractive
banking franchise.
We will make continued efforts to meet our shareholders’expectations. As your CEO, I am confident we can deliver anotheryear of good performance and profitability in 2006. I thank you foryour continued support, and I wish happiness and prosperity foryou and your families.

Richard F. Wacker
President & CEO

KOREA EXCHANGE BANK 2005 ANNUAL REPORTREVIEW OF OPERATIONSSMART & PROFITABLEGROWTH
KEB is committed to achieving smart andprofitable growth in all of our operations.
We demonstrated this last year by playing
to our F/X and trade finance strengths in
Global Corporate Bank operations, byincreasing the capabilities of our RetailBank in affluent banking, and by putting
our Card Bank on a strong and profitablefooting.

REVIEW OF OPERATIONSKOREA EXCHANGE BANK 2005 ANNUAL REPORTPROVEN ADVANTAGE
We tailor our services in the Global Corporate Bank to theunique requirements of every client, large or small. We also
strive to leverage KEB’s proven advantage in foreignexchange, trade finance and global branch network toremain a step ahead of our competitors.
PARK, JONG LIM_ Senior Manager, Trade & Services Division

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Global Corporate Bank(GCB)
Overview

Large Corporate Business

The Global Corporate Bank (GCB) is one of KEB’s three main
businesses, along with the Retail Bank and Card Bank.
Comprising six client channels and product centers, GCB
handles an extensive range of KEB’s core banking services
and products.

Loan demand from the Large Corporate borrower group hasremained relatively flat in recent years as direct access to
global capital markets has reduced the reliance of thosecustomers on bank financing. Nevertheless, KEB extended
2.6 trillion won of Won currency loans in 2005, up 12.7% from
2.3 trillion won in 2004. The weighting of Large Corporate Won
currency loans increased 0.2%p YoY to 8.8% as of year-end
2005.

KEB’s Corporate Group is dedicated to serving the needs ofsmall & medium-sized enterprises (SMEs), the largest
beneficiaries of KEB’s lending activities. The World Corporate
Group and Large Corporate Support Department are
responsible for large corporate customers both domestic andour multi-national corporate customers. The Global Products
Department handles the development and management of
products and services relating to foreign exchange and tradefinance as well as e-business. The Global Markets
Department is tasked with foreign exchange trading,securities trading, derivatives financial products, custody,
investment banking, and foreign currencies settlements, etc.
Lastly, the International Department manages the activities of
KEB’s overseas network.

Having resolved our legacy burden of non-performing loans
extended to major conglomerates prior to the Asian financial
crisis, KEB has rebuilt its Large Corporate lending portfolio
via strategies that emphasize balance, profitability andcustomer-responsiveness. Beyond lending, KEB has
strengthened our role as customized solution provider for
global corporations, offering a diverse range of financial
services from cash management, derivative-related products,
structured financing, securities services, and of course ourtrade-related solutions.
F/X & Trade Finance

SME BusinessIn 2005, KEB managed to expand its loan support to Korea’s
small & medium-sized enterprises (SMEs), a traditional corecustomer segment.
The bank’s Won currency loans extended to SMEs stood at
12.9 trillion won as of year-end 2005, representing an
increase of 8.2% YoY from 11.9 trillion won. As a result, theweighting of SMEs in the bank’s total Won currency loans
increased from 41.1% to 41.3% YoY.
Through clear customer segmentation in SME lending
operations, the bank utilizes best practices relying on its
proven advantage in the export & import business. KEB’s “YesBest Partner Loan” and “KEB Prime Loan” program oftargeting export/import-oriented and high-quality SME clients
contributed significantly to our “quantity and quality”
approach toward this key borrower category.

With the most extensive global presence among Koreanbanks as well as a continuous rollout of strategically targeted
F/X products and promotional campaigns throughout theyear, KEB maintained its unrivalled lead in the areas offoreign exchange and trade finance in 2005.
In 2005, KEB handled 46% of all F/X transactions conducted
through the eight largest Korean commercial banks,
maintaining a firm lock on the market leadership we haveheld for decades. Our nearest competitor had 14%. Based onnationwide foreign trade volumes, our shares of the export
and import transactions were 25% and 27%, respectively,reflecting clear leadership in the trade finance market.
Recognizing our capabilities, the authoritative journal Global
Finance again selected KEB as “Best Foreign Exchange Bankin Korea” and “Best Trade Finance Bank in Korea” for 2005.
They mark the fifth and sixth consecutive years, respectively.
These honors only reinforce the bank’s determination toretain its unrivalled position in foreign exchange and tradefinance in the years to come.

REVIEW OF OPERATIONSKOREA EXCHANGE BANK 2005 ANNUAL REPORTThe KEB advantage in foreign exchange business comes not
only from our growing array of customer-pleasing F/X
products, but also from distinguishing ourselves in the level ofservice quality and specialization that customers can expect
to receive at our branches in Korea and abroad.
In the area of trade finance, the bank provides acomprehensive menu of services that make internationaltransactions faster and more efficient. KEB offers exchange
risk hedging products after helping customers their foreignexchange exposure based on F/X assets and liabilities. In
addition, we operate an internet-based EDI (Electronic Data
Interchange) service for online automation of trade-related
document handling, eliminating the need to make personal
trips to the branch. In 2005, one of KEB’s product experts
received special commendation from top government
agencies for his contribution to service innovation asdemonstrated in the development of the “National Electronic
L/C Advising System.”
Investment Banking
For roughly three decades, KEB has been the pioneer andpacesetter of the nation’s investment banking (IB) industry.
Our Investment Banking Division brings competitive franchise
expertise and experience to bear in the areas of underwriting,securitization, structured finance and M&A advisory service,garnering industry recognition and the praise of clients year
after year.

Custody & Fund Administration
KEB continued to play a leading custody provider toinstitutional investors and government pension schemes in2005. With our subsidiary KEB Investors Service acting as
administrator, we offer a total-solution approach to custodialservices and fund administration. Our clients are local andoverseas institutional investors, including government
agencies, pension funds, asset management companies,
insurance companies and foreigners investing in Korea. Our
custody services range from securities settlement,
safekeeping and entitlement processing to F/X, cash
management, compliance and NAV monitoring, performancemeasuring, and consolidated and multi-currency accounting
services. KEB also provides asset management support for
Korea’s Ministry of Labor.
Currently, KEB accounts for approximately 15% share of
Korean custody market. Last year the bank enjoyed solid
growth in total assets under custody, rising 21.6% to USD48.9
billion with balanced expansion in three main sectors:
domestic, cross-boarder and agency services consisting of
securities lending, ABS trustee and escrow accounts.
Our outstanding service capability was evidenced by KEB
becoming the first bank in Korea to earn an overall “A+” ratingfrom Thomas Murray , the London-based internationalcustody rating agency.
Foreign-invested Enterprises

Last year, KEB played a key role in arranging loans for Hynix
Semiconductor, Inc.. KEB was the book runner & joint
coordination arranger for syndicated loan and revolving credit
facility totaling USD1,800 million, in what was the largest
international deal done in Korea during 2005.
The Korean IB market environment is undergoingfundamental transition. In addition to mounting competition
from domestic securities firms and global players, there is
ample liquidity at home and abroad, a slowdown in corporate
investment, a tightening of pricing, and changes in clients’needs. In response, KEB is pursuing a mixed strategy that
includes diversification of new profit models andstrengthening our capabilities in acquisition finance,
investment in SOC (Social Overhead Capital), BTL(BuildTransfer-Lease) projects, energy field projects, and realestate development.

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KEB has distinguished itself as the first choice for many
foreign-invested enterprises (FIEs) operating in Korea,
leveraging our expertise as Korea’s foremost FX & trading
finance handler, as well as our advanced e-banking platformthat includes the popular “CMS Plus”, online cash
management service.
KEB succeeded in attracting an additional 516 FIEs to thebank’s client roster in 2005, raising the total to 4,636 at yearend 2005. In terms of official FDI notification through the bank,
KEB represented 34% of all cases nationwide, the highest
share among all Korean banks.
The bank is bolstering its FDI-related marketing in
conjunction with related institutions, chambers of commerce,
law firms and others, speeding up the FDI notification
process, and strengthening co-marketing efforts. KEB is alsoplanning to establish a dedicated FDI sub-branch in alliancewith “Invest Korea (KOTRA)” to handle the specific needs of
our existing and potential FIE customers.

Continuous Linked Settlement

Overseas Operations

Continuous Linked Settlement (CLS) is the electronic crossborder settlement of foreign exchange transactions between
global financial institutions. Through CLS, both sides of a FX
transaction are settled simultaneously on a real-time
payment versus payment basis with multi-lateral netting.

Our customers have very broad, diverse and internationalbanking needs. So KEB has built an extensive overseas
network of branches and offices to serve those needs. This
broad global network enhances our capabilities in tradefinance, F/X, and remittance businesses, and allows us tobetter meet our customers’ requirements as their business
operations expand overseas. As of the end of 2005, KEB’s
overseas operations included 17 branches, 9 subsidiaries and2 representative offices in 21 countries.

CLS system consists of 56 major financial institutions aroundthe world, including KEB, which act as Settlement Member
Banks (SMB) and 674 as Third-Party Banks (TPB) as ofJanuary 2006. KEB has acted the Settlement Member andKorean Won Liquidity Provider for CLS Bank International
since December 2004.
After its first full year in service, KEB currently settles foreignexchange transactions via CLS for 12 out of 15 local banks,
accounting for about 90% of CLS Won currency transaction
volume in Korea. KEB’s CLS transactions have increased
dramatically from a few thousand cases in January 2005 to
more than 53,000 cases in February 2006, and this trend is
expected to continue. KEB’s CLS service has strengthened its
leading position in the foreign exchange business.
In addition to its successful positioning in CLS Third Party
Bank Services, KEB is also taking the lead in Korean Won
Nostro accounts services for foreign CLS member banks.
Currently, KEB is the only bank providing Won Nostro accountservices in Korea, and we expect to extend this service to themajority of foreign banks preparing for Korean Won CLS
settlement.

Just as different regions of the world experience upturns anddownturns in line with the shifting focus of the global
economy, so too does KEB’s overseas branch network. We
continually monitor regional and local business conditions
and are prepared to react swiftly when necessary,
restructuring and realigning our presence based on the longterm outlook of each market where we operate.
Last year, KEB continued to solidify its presence in dynamic
and growing new markets around the globe, including the socalled BRICs economies. To capitalize on growing businessprospects in high-growth markets, KEB established liaison
offices in Shenzhen, China and Moscow in 2004, followed by
an office in Santiago, Chile in 2005. In addition, throughrecapitalizing the bank’s subsidiary in Brazil, KEB has begun
to actively regain business in the South American market.
KEB increased our stake in our profitable and growing
Indonesian subsidiary, P.T. KEB Indonesia, to 99% byacquiring the 14% minority shareholding of P.T. Bank
Danamon, thereby improving the financial stability of thesubsidiary and strengthening our marketing focus inIndonesian financial markets.
On the other hand, we restructured underperforming
branches and subsidiaries. Due to the suspension of
construction work on North Korea’s light-water reactor
project at the end of last year, KEB closed its Kumho
Representative Office in January 2006. We also reachedagreement to sell our entire 31.5% stake in CFEB (Cairo Far
East Bank) to Bank Audi of Lebanon. This sale closed in
March 2006, culminating a long-term project to sell the CFEB
shares as part of KEB’s efforts to improve capital usage since
the Asian financial crisis.

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REVIEW OF OPERATIONSKOREA EXCHANGE BANK 2005 ANNUAL REPORTRIGHT PRODUCTS TO
RIGHT CUSTOMERSWith better customer-focused marketing strategies and productofferings, we deliver ‘the right products to the right customers’.
The Retail Bank offers a variety of new deposit products, meetingthe needs of specific customer segments. To meet the demandfor personalized investment products, KEB offers the best
performing products to our customers from which ever fundmanager we choose.
PARK JOO YONG_ Senior Manager, Retail Market Development Division16

Retail Bank
KEB’s retail bank operation has been expanding its businessboundary from traditional customer deposits & loans businessto become a wide-range financial product provider throughbancassurance, beneficiary certificates sales, and etc.
Deposits
Rather than engage in cutthroat interest rate competition withother banks to lure general depositors, KEB pursued a more
prudent policy approach of controlling funding costs, whilestill protecting our relationships with our most important andprofitable customers. As a result, total deposits declined
slightly 0.5 trillion won or 1.4% YoY to 38.0 trillion won as of
year-end 2005.
To adapt to low market interest rates, the bank concentrated
its energies in developing a variety of new deposit products.
First, we introduced new deposit accounts that combine thecharacteristics of equity-linked deposits and time deposits,
creating a new hybrid that met customer demand forinvestment-type alternatives to standard deposit instruments.
Most recently, KEB unveiled a very creative sports marketing
program with the launch of the “Lee Young-pyo Soccer
Deposit,” featuring Korea’s star soccer player, with attractive
interest rates linked to the performance of the Korean
National team in the 2006 World Cup.
Household Lending
Our household loan portfolio saw substantial growth of 11.0%
in 2005, rising from 12.2 trillion won in 2004 to 13.5 trillion
won. Of this total, housing-related lending reached 8.8 trillion
won, representing an increase of 5.9% YoY. General-purpose
consumer loans were 4.7 trillion won, a large increase of
21.8% YoY demonstrating KEB is not dependant simply on themortgage market for its healthy growth .
This impressive performance resulted from KEB’s
determined efforts to identify our best customers and todevelop new loan products tailored to meeting their needs.
Notable success was achieved in sales of the bank’s “Leaders
Loans” aimed at employees of good performing companies,
and in sales of “Yes Pro Loans” targeting doctors, lawyers andother high income generating professionals.
Private Banking
Rising expectations of high net-worth individuals (HNWIs)
requiring a “total financial service package” approach to
product & service development and delivery. Responding to

the diverse and evolving needs of HNWIs, KEB re-launched its
Private Banking business and its Wealth Management
Centers (WMCs) as independent branches solely dedicated to
PB business.
In 2005, KEB operated three WMCs while consolidating thenumber of PB Branches from 65 to 50 in order to ensure a
consistently high level of capabilities and performance for our
HNWI customers.
Through our strong Private Banking network, KEB leverages
its superior F/X know-how and overseas branch network toprovide a whole new level of Global Wealth Management
expertise and consulting that can’t be found at any other
Korean bank.
Bancassurance
After nearly three years in operation, KEB’s bancassurance
business - the sales of various third-party insurance products
through our branch network - has achieved outstanding
results.
KEB boosted its market share from 11.6% in 2004 to 13.1% in
2005, expanding its partnerships with insurers such as
Allianz, ACE and Shindongah. Profits from our bancassurance
business stood at 31.1 billion won, representing an increase of
19.2% from 26.1 billion won in 2004..
Our strong performance in bancassurance and other feebased products despite a relatively small number of branches
shows the quality and attractiveness of the KEB customer
base.
Sales of Investment Products
In 2005, low interest rates and the bullish mood of the Koreanstock market fueled demand for personalized investment
products. KEB’s results were particularly rewarding, withassets under management (AUM) rising a solid 19.5% from
3,401 billion won at year-end 2004 to 4,065 billion won at theclose of 2005. Even more impressively, profits from sales ofinvestment products soared from 8.5 billion won to 26.5 billion
won YoY.
Rather than managing and selling its own investment
products, KEB has adopted an “open architecture” approach,offering our customers the best performing third-party
managed products that are ideally suited to their diverse
needs. The bank also relies on its expertise in the foreignexchange field to support sales of offshore funds. At the endof 2005, KEB handled sales of a total 73 onshore funds and 83
offshore funds.

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REVIEW OF OPERATIONSKOREA EXCHANGE BANK 2005 ANNUAL REPORT

Card BankIn February 2004, the credit card operations of troubled
subsidiary KEB Credit Services were merged and integrated
into KEB. The merger solved the capital and liquidity
problems of KEBCS, and has enabled rehabilitation of thecard business through closer integration with various
operations of KEB, such as treasury, investment technology,
credit assessment, and marketing through our branch
network.
KEB’s effort to fix the business in the shortest possible
timeframe paid positive results as the bank successfully
addressed massive bad credit card assets and restructured
the card business for profitability by the end of 2004.
2005 represented the first full year of normalized business for
the Card Bank, and the results have been highly encouraging.
The business recorded a net profit of 257.3 billion won, andasset quality was normalized as we slashed our carddelinquency ratio by 3.4%p to a healthy 4.3% at year-end 2005.
Efforts to restore sound asset quality of the credit card
portfolio continued into the 1st half of 2005, with bad asset
write-offs and restructuring of high-risk accounts generating
continuous asset size reduction. KEB successfully improved
the quality of its assets by shifting higher risk cash advance &card loans to better balanced card portfolio. With these efforts
completed, for the first time since the merger, KEB’s credit
card receivables began to grow from a low point of 2.2 trillion
Won in 3Q2005.
With asset quality objectives achieved, KEB is pursuing safeand profitable growth as a competitive provider of versatilecard solutions, the Card Bank pursued a three-pronged
strategy last year of improving sales capabilities,
strengthening profitability, and expanding a foundation forstable earnings.
This included further differentiating our card products &services by analyzing the offerings of our competitors andidentifying areas where customers’ needs weren’t being met.
The result was a series of new card products (Expat Card forforeign residents, World Cash Card for overseas travelers,
WMC Membership Platinum, etc.) with unique andpersonalized user benefits. Special promotions, customer
segmentation, database-driven cross-selling, and other
innovative marketing techniques were employed to fully
attack these opportunities.

18

One of our most noteworthy product launches in 2005 was“Expat” card. As one of the measures to target profitablecustomer segments, the “Expat” card meets the special
needs of expatriates living in Korea. Special services include
dedicated credit underwriting, English billing statement,
English hot line and English web-site. The “Expat” card, whichis the only one of its kind in Korea, is backed by the VISA
platinum card program and provides significant and relevant
benefits and features.
To shore up profitability, we implemented risk-based pricing
in setting interest rates, we introduced new fees &commissions and we reduced our processing expenses. To
expand our stable earnings base, KEB launched promotional
events and programs during the year to induce qualified cardloan customers and promote revolving credit services. We
also worked to strengthen ties with our top 5,000 member
merchants, reinforced support for outstanding cardcustomers, upgraded quality assurance, and revamped backoffice operations.
In the year ahead, KEB will continue to pursue these same
objectives of broadening the earnings base and enhancing
sales competitiveness, while at the same time actively
cultivating customer loyalty.

18
19

CUSTOMER-FOCUSED
Restoring strong asset quality, turning a profit and creating astable earnings basis were our main tasks for 2005.
Now the Card Bank can concentrate on developing andmarketing new card products, cross-selling and othercustomer-focused activities.
AN, EUN HYUN_ Associate, Card BankREVIEW OF OPERATIONSKOREA EXCHANGE BANK 2005 ANNUAL REPORT

Risk Management
Risk Control & Management
Credit Risk: Our credit risk systems using Credit VaR
calculations enable us to manage customers’ potential losses
at an appropriate level based on the category of credit ratingsor business units. Also, through implementation of theindividual loan rating system, KEB has established thefoundation for implementing RAPM (Risk Adjusted
Performance Measures Assessment) across our bank.
Market Risk: KEB employs the global standard RiskWatch
tool to assess market factors and their impact on all financial
products, making daily mark-to-market valuations,correlations to estimate Market Value-at-Risk (VAR),
sensitivity calculations and scenario analyses. KEB also
calculates interest rate risk using interest rate sensitivity gap
and effective duration gap, in conjunction with Earnings at
Risk (EaR) management.
Liquidity Risk: Our Daily Assets Liabilities Management
system enables KEB to manage both liquidity ratio andliquidity risk, while our liquidity risk Contingency Plan ensuresthat KEB stands ready to meet any type of potential liquidity
crisis with rapid-response measures.
Operational Risk: To manage and mitigate operational risks,
KEB conducts regular inspections and has adopted monthly
and quarterly checklists covering its unique aspects of risk.
New Basel Capital Accords (Basel II) Preparations
Basel II, which will be effective from the end of 2007 in Korea,
aims to enhance risk management abilities in the global
banking industry by requiring adequate capital reserves for
credit risk, market risk and operational risk.
KEB is actively preparing for the introduction of theFundamental Internal Ratings Based Approach for credit risk
and the Advanced Measurement Approach for quantifying
operational risk contained in Basel II. We believe the bank’s
preparation for Basel II are in good order.
The bank plans to complete IT implementation for credit risk
& operational risk measurement by the end of June and begin
Use Tests from July of this year, in order to prepare forpreliminary operation of systems prior to the actual
implementation of Basel II at the end of 2007.

20

Information
Technology (IT)KEB has devoted significant resources to building a new IT
infra structure for the future of the bank. Our intensive efforts
delivered the successful conversion of all bank operations to
the Next Generation Banking System (NGBS) as of February
2005. Through NGBS, KEB enhanced convenience efficiency
and flexibility in providing services for today’s corporates,
retail, and card customers.

FORCE BEHIND
THE SCENES
You won’t see us behind the teller’s window, but we’redefinitely hard at work behind the scenes helping KEB’s
electronic systems operate smoothly and efficiently. We
enable the delivery of every product or service and are
the forces behind the rapid growth in KEB’s e-Banking& e-Business solutions
KIM, HONG YEOP_ Assistant Manager, IT Operations Division

For much of 2005, we enhanced the bank’s competitivenesswith new programs and built an IT support system for major
business area. To promote further expansion of KEB’s
bancassurance business, the new IT system was developed tohandle a wider range of insurance products. Another successof our IT efforts was the development of the bank’s “WealthManagement System” to provide first-class financial
consulting services.
e-BusinessWe sought to increase both revenues and our customer basein 2005 by developing new and improved e-Banking products& services, and by reinforcing our e-Business marketing andpromotion strategies. These efforts paid off as managementtargets across the board were met or exceeded. Monthly
average private and corporate e-Banking customers rose to823,000 individuals, a 14.9% YoY rise, and to 8,243 companies,
a 21.0% rise. Monthly average e-Banking transactions during
the year stood at 9.6 million transactions, over 40% of totalbank transactions.
Best Cash Management Bank
Our proven leadership in the field of e-banking wasrecognized by Asiamoney, which selected KEB as “Best CashManagement Service Bank in Korea” of 2005. KEB not only
earned top honors as Best CMS Bank, but our CMS Plus waschosen “Best CMS Product of the Year” as well.
Over 14,000 domestic large and small corporations, including
700 global overseas investment firms, already make active
use of the diversified electronic banking services that CMS
Plus offers: cash collection, electronic settlement, fundtransfer, F/X, foreign currency account management andmany others. New CMS features aimed at making banking
simpler and more convenient for our corporate clients include
strengthened cash forecasting, F/X risk-hedging, cash
sweeping and netting.

20
21

REVIEW OF OPERATIONSKOREA EXCHANGE BANK 2005 ANNUAL REPORTCARING & SHARINGAs employees of one of Korea’s most profitable financial
institutions, we feel a duty and a desire to help our community.
The KEB Foundation channels our time, energy and contributions
effectively into worthy causes. We are also proud that KEB is at
the industry forefront in merit-based hiring & compensation andmanagement compliance & ethics.
PARK, KI WON_ Associate, KEB Foundation

22

Building a “Foundation for
Sharing”
KEB has carried out its role as good corporate citizen in thecommunities where we do business. Our management andemployees of KEB have voluntarily and consistently
participated in extensive program of community service. KEB
also has made it easier for “netizens” to donate to or
participate in community services to charitable organizations
through its internet homepage.
KEB’s charitable and community activities were reinforced as
the “KEB Foundation” was launched in December 2005, thefirst community support organization founded by a financial
institution in Korea.
In addition to an initial donation of 6 billion won and ongoing
assistance from the bank’s management, the Foundation
enjoys the support of over 400 employees of KEB who lend
their time and talent to a variety of local community activities
and charitable works at home and abroad.
Indicative of the high profile and great importance the bankplaces on the Foundation, its directors include former First
Lady Lee Hee-Ho (wife of former President Kim Dae-Joong),
and Wall Street Journal “Top 50 Women to Watch” designee
Kim Sung-Joo. KEB Chairman Robert E. Fallon serves aschairman of the Foundation’s board of directors.
The KEB Foundation represents a departure from previous
and other existing charity, community service and social
welfare programs, which tend to focus resources andattention on single-issue, one-time or temporary events. The
objective now is to engage in year-round activities in a more
systematic and sustained manner.
Contributions to the funding of Foundation activities and dayto-day operation will come from a variety of sources. KEB will
provide support annually, while employees will make personal
donations of time or money. Customers themselves can also
get involved in the Foundation’s good works via the KEB
Foundation Deposit product, 0.1% of sales of which go to theFoundation.

Creating an Advanced
Corporate Culture
Just as the bank has pioneered new frontiers in financial
products and services, KEB is also proud to be the industry
trendsetter in creating a corporate culture where all
employees are encouraged to excel.
Traditional hiring practices in Korea have for too long placed
too much emphasis on age, gender and school ties. However,
KEB became the first financial institution in the country to
implement an open hiring system focused on the individual
abilities and talents of every job applicant.
Recently, the bank hired 118 new employees without
imposing the standard educational or age guidelines, seeking
only the best manpower based purely on their merits. The
results showed a healthy mix and an even distribution interms of age, gender, marital status, and academic
background. Likewise, the bank applied the same fair andopen hiring criteria in converting 55 former contract
employees into regular bank staff, further demonstrating
KEB’s firm commitment to new standards of equality andmeritocracy in personnel policy. Moreover, staff placement
decisions are made jointly by functional leaders and Human
Resources, in careful consideration of each employee’s
background and abilities, making every effort to ensure thatthe bank has “the right person for the job” in every area of ouroperations.
The bank strives to encourage and challenge the staff toimprove their abilities and expertise, as well as to reward
their achievements. The new “Rose Bonus” system,
introduced in July 2005 for all KEB staff, provides incentives
based on the growth of the bank’s share price and book value
per share (BPS). Through cash rewards to employees forenhancing corporate value, the bank encourages staff loyalty
and dedication, and helps KEB achieve key performancetargets.

22
23

KOREA EXCHANGE BANK 2005 ANNUAL REPORTFINANCIAL SECTIONManagement Discussion & Analysis

25

Non-consolidated Independent Auditors’ Report33

Non-consolidated Balance Sheets

34

Non-consolidated Statements of Income

35

Statements of Appropriation (Disposition) of Retained Earnings(Accumulated Deficit)

37

Non-consoliated Statements of Cash Flows38

Notes to Non-consolidated Financial Statements

40

Internal Accounting Control System Review Report

89

Consolidated Independent Auditors’ Report

90

Consolidated Balance Sheets

91

Consolidated Statements of Income

92

Consolidated Statements of Changes in Shareholders’ Equity

94

Consolidated Statements of Cash Flows95

Notes to Consolidated Financial Statements

97

MANAGEMENT DISCUSSION & ANALYSISManagement Discussion & Analysis was prepared on the basis of the results of non-consolidated financial statements.

1. Key Financial Data
(In Billions of Korean Won)2005
Operating Results
Total Income
Net Interest Income
Fees & Commissions
Non Interest Income
Total Expenses(G&A)
Operating Income
Net Income
Profitability Indices
Net Interest Margin (NIM)
Return on Assets
Return on Equity
Balance Sheet Data at Year-End (Including Trust Account)
Total Assets
Total Credits
Total Deposits
Asset Quality
NPL Ratio
NPL Coverage Ratio
Precautionary & Below Ratio
Pre & Bel. Coverage Ratio
Delinquency Ratio
Capital Adequacy
BIS Ratio
Tier I ratio
Tier II ratio

2004

YoY

2,417.6
1,677.2
468.4
272.1
995.3
1,422.3
1,929.3

2,338.4
1,624.3
552.8
161.4
847.0
1,491.4
522.1

+3.4%
+3.3%
-15.3%+68.6%+17.5%- 4.6%+269.5%

3.23%
3.05%
43.97%

2.41%
0.81%
19.43%+0.82%p+2.24%p+24.54%p

72,719.8
43,475.5
44,245.6

67,167.7
41,529.0
43,765.6

+8.3%
+4.7%
+1.1%

0.90%
157.3%
1.95%
72.2%
0.93%

1.82%
108.8%
3.57%
55.3%
1.78%

-0.92%p+48.5%p-1.62%p+16.9%p-0.85%p

13.68%
9.65%
4.04%

9.47%
5.51%
3.96%

+4.21%p+4.14%p+0.08%p

2. Overview
In 2005, KEB proved itself to be a top-tier bank in Korea as it set record-high earnings and realized significant improvements in both capital
adequacy and asset quality.
Net income for 2005 was 1.9 trillion won, more than triple the previous year’s net income of 522.1 billion won. Recognizable improvement in
profitability with solid results each quarter demonstrated the financial soundness of KEB and the ability to generate stable earnings going
forward.
Capital-building efforts backed by improved earning power delivered the best capital adequacy in the bank’s history. The bank’s BIS capital ratio
increased to 13.68% in 2005 from 9.47% in 2004, an increase of 4.21%p YoY. Tier 1 ratio also grew to 9.65% in 2005 from 5.51% in 2004, anincrease of 4.14%p YoY, demonstrating strong capitalization.
Asset quality also steadily improved, with ratios for non-performing loans and delinquency reaching 0.90% and 0.93%, respectively, both below
the peer average.

3. Profitability1) Summary of Profitability
Net income increased to 1,929.3 billion won in 2005 from 522.1 billion won in 2004. The increase in net income was due to a combination of solid
business performance and steadily increased lendings, improved Net Interest Margin (NIM), and gains on monetization of assets as part of thebank’s capital-building efforts.
With complete normalization of credit card business, the card bank returned to profitability from a deficit of 558.9 billion won in 2004 to a profit of
257.3 billion won in 2005, making itself again a key business component for the bank.

24
25

MANAGEMENT DISCUSSION & ANALYSIS

Allowance for loan losses declined substantially due to the normalization of bad debts and improved asset quality. The increase in net income
was also driven by significant special asset monetization actions, including the sale of Hynix shares, as well as the substantial reduction in loan
loss provisioning. Furthermore, a 300.6 billion won of deferred income tax profit also contributed to the increased profitability.
With the tremendous gain in profitability, KEB had an ROA of 3.05% and an ROE of 43.97%, proving KEB to be a world-class bank.

(In Billions of Korean Won)
FY2005Total
Net Interest Income
Fees & Commissions
Non Interest Income
Total Income
Total Expenses(-)
Operating Income
Impairment Loss, etc.(-)
Income Before Provisions
Provisions & Others(-)
Net Income

Bank

4Q
Card

Total

Bank

3Q
Card

1,677.2 1,150.0 527.1 465.3 335.4
468.4 582.1 -113.8 127.2 161.1
272.1 243.1
29.0
60.2
41.1
2,417.6 1,975.3 442.3 652.7 537.6
995.3 900.0
95.2 333.7 306.9
1,422.3 1,075.3 347.1 319.0 230.7-436.1 -442.8
6.7 -254.3 -255.5
1,858.5 1,518.0 340.4 573.3 486.1-70.9 -154.0
83.2 -186.6 -235.9
1,929.3 1,672.0 257.3 759.9 722.1

Total

2Q

FY2004

1Q

Bank

Card

Total

Bank

Card

Total

Bank

Card

129.9 417.0 285.4-33.9 119.1 145.4
19.2
58.6
66.8
115.1 594.8 497.7
26.8 231.9 210.0
88.3 362.9 287.7
1.2 -188.4 -188.4
87.1 551.2 476.0
49.4
27.7
18.1
37.8 523.5 458.0

131.6
-26.3
-8.2
97.1
21.9
75.2
75.2
9.7
65.5

412.5
115.7
71.9
600.1
223.7
376.4
33.1
343.3
23.1
320.1

280.6
143.7
46.5
470.7
200.6
270.1
28.9
241.3
3.3
237.9

132.0
-28.0
25.5
129.4
23.2
106.2
4.2
102.0
19.8
82.2

382.3
106.4
81.3
570.0
205.9
364.2
-26.5
390.6
64.8
325.8

248.6
131.9
88.8
469.3
182.5
286.8
-27.8
314.5
60.5
254.0

133.7 1,624.3 1,131.7 492.6-25.5 552.8 625.7 -72.9-7.5 161.4 373.6 -212.2
100.7 2,338.4 2,131.0 207.4
23.3 847.0 756.9
90.1
77.4 1,491.4 1,377.1 117.3
1.3
46.3
40.5
5.8
76.1 1,445.1 1,333.6 111.5
4.3 923.0 252.5 670.5
71.8 522.1 1,081.0 -558.9

Total

Bank

Card

Even aside from the extraordinary events of 2005, KEB’s earning power demonstrated a steady increasing trend with normalized quarterly net
income growing to 270 billion won in 4Q2005 from 233 billion won in 1Q2005.

(In Billions of Korean Won)
Quarterly Net Income Trend
Reported Earnings

Special Gains
Normalized Net Income
Special Charges

1Q’05

2Q’05

3Q’05

4Q’05

326

320

523

760

660
254
123

80

233

240

269

270

-30

-170

Details of Special Items

Special Gains

Special Charges

26(In Billions of Korean Won)
Sale of Debt-to-Equity swapped positions
Recoveries of NPLs
Sales of NPLs
Deferred Tax Effect
Others
Total
Special Bonus
Retroactive CBA payment
Regulatory Reserve Changes
One-off provisioning item for NPLs
Total

1Q`05

2Q`05

15
54
54
123
30
30

3
37
40
80
-

3Q`05
127
97
30
254
-

4Q`05
277
27
23
300
33
660
50
20
100
170

FY2005
422
215
147
300
33
1,117
50
20
100
30
200

MANAGEMENT DISCUSSION & ANALYSIS

2) Net Interest Income
Interest revenue in 2005 showed a slight decline compared to the previous year. However, the solid performance in loan growth helped to offset
the bulk of the reduction of interest revenue due to prevailing low interest rates.
Interest expenses decreased significantly thanks to cost savings from the replacement of high-cost debentures and subordinated debts.
As a result of cost savings on the funding side, net interest income for 2005 increased to 1,677.2 billion won, up 3.3% from the previous year.

(In Billions of Korean Won)
FY 2005
Interest Revenue
Income on due from banks
Interest on securities
Interest Income on loans
Bank
Card
OthersInterest Expenses
Interest on deposits
Interest on borrowings
Interest on debentures
OthersInsurance expense for deposits& Contribution for Credit
Guarantee Fund ( - )Other interest income
Net Interest Income
Bank
Card

4Q

3Q

2Q

FY 2004

1Q

YoY

3,266.626.0
450.9
2,768.9
2,140.8628.1
20.8
1,495.9
935.3
209.2
334.0
17.4

874.3
7.1
134.6
728.1
574.6
153.5
4.6
376.2
236.0
61.2
74.0
5.0

807.7
7.2
101.6
694.4
541.3
153.1
4.6
368.5
235.4
54.4
74.4
4.3

802.5
6.6
112.0
679.7
525.4
154.4
4.1
375.1
231.1
49.6
91.1
3.3

782.0
5.1
102.7
666.7
499.6
167.1
7.5
376.1
232.8
43.9
94.5
4.8

3,359.3
23.2
521.3
2,788.0
2,160.2
627.8
26.8
1,640.1
1,036.3
157.2
431.5
15.2

-2.8%
+11.9%-13.5%-0.7%-0.9%-22.5%-8.8%-9.7%+33.1%-22.6%+14.7%

100.8
7.3
1,677.2
1,150.0
527.1

30.3
-2.5
465.3
335.4
129.9

23.3
1.0
417.0
285.4
131.6

23.6
8.8
412.5
280.5
132.0

23.6
382.3
248.6
133.7

101.2
6.3
1,624.3
1,131.7
492.6

-0.4%
+15.8%
+3.3%
+1.6%
+7.0%

3) Net Interest Margin (NIM)
The bank’s NIM jumped to 3.23% in 2005. This reflected a reclassification of fee income generated by the credit card sector as interest income
according to the change in accounting methods promulgated by the Financial Supervisory Service. This change was reflected in the NIM
calculation method beginning from 4Q2005.
On a comparable basis before the accounting change, NIM for FY2005 rose to 2.59%, up from 2.41% in 2004, representing constant improvementfrom the cost savings on replacement of high-cost debentures, as well as a stable loan-to-deposit spreads through disciplined interest rate
management.

(Unit: %)(Accumulated Basis)
Net Interest Margin (NIM)
NIM in KRW
NIM in Foreign currency
Loan to Deposit Spread in KRW (a-b)
Interest rate on Loans in KRW (a)Interest rate paid on Deposits in KRW (b)2005
4Q
3.23 (2.59)*
3.69 (2.89)*
1.62
3.13
6.00
2.87

3Q
2.55
2.82
1.65
3.12
5.99
2.87

2004
2Q
2.49
2.78
1.55
3.12
6.02
2.90

1Q

4Q

2.34
2.54
1.70
3.02
5.98
2.96

* ( ) represents the figures using the original method before the changes in FSS's NIM calculation

2.41
2.70
1.53
3.08
6.41
3.33

3Q
2.37
2.67
1.51
2.99
6.39
3.40

2Q
2.24
2.52
1.41
2.98
6.43
3.45

1Q
2.27
2.57
1.44
2.94
6.40
3.46

26
27

MANAGEMENT DISCUSSION & ANALYSIS

4) Fees & Commissions
Fees & commissions remain a strong component of total income. KEB has further diversified its fees & commissions structure with robust
performances in bancassurance and beneficiary certificates sales.
In 2005, despite the strong Korean won, KEB sustained a stable income trend in FX gains from customer transactions. However, the valuation
loss (non-cash adjustment) on the financial derivatives for the interest swaps related to Korean Won subordinated debts caused the decline inoverall FX transaction gains. Economically, this valuation adjustment is offset by higher floating rate income on the earning asset side.
Overall fees & commissions showed an increase led by strong growth from domestic business-related fee income such as bancassurance &beneficiary certificate sales, offsetting the decrease in foreign currency-related fee income. The foreign currency-related fee income was affectedby the price pressure as the Korean Won appreciated, due to the structure of the bank’s fee system which is quoted as percentage of foreign
currency amount.
In the credit card sector, the Financial Supervisory Service promulgated a major accounting rule change starting from 1Q2005 whereby mostcredit card fee income was reclassified as interest income.
(In Billions of Korean Won)
FY 2005
Bank

Gains from FX transaction
Customer transaction
P/L on valuation of derivatives
Debenture IR Swaps
Other derivatives
Fees & Commissions
KRW currency related
Foreign currency related
OthersBank - Total
Total excl. P/L on valuation of
Derivatives

Card
Total

4Q

3Q

2Q

FY 2004

1Q

YoY

244.8
213.6
31.3
-18.8
50.0
337.3
151.3
129.4
56.5
582.1
550.9

66.4
56.4
10.0
-3.7
13.6
94.7
44.6
34.7
15.4
161.1
151.2

61.4
54.7
6.7
-4.8
11.5
84.1
39.9
30.8
13.5
145.4
138.8

61.4
53.3
8.1
-0.4
8.5
82.3
35.5
32.2
14.6
143.7
135.6

55.7
49.2
6.5
-9.9
16.5
76.1
31.4
31.7
13.0
131.8
125.3

292.9
213.1
79.8
32.5
47.3
332.9
130.3
140.2
62.3
625.8
546.0

-16.4%+0.2%-60.8%
U.
+5.8%
+1.3%
+16.1%
-7.7%
-9.2%
-7.0%
+0.9%

-113.8
468.4

-33.9
127.2

-26.3
119.1

-28.0
115.7

-25.5
106.3

-72.9
552.8

U.
-15.3%

5) Non-Interest Income
The merchant account sector showed a large decrease in income compared to 2004, primarily due to the bank’s intentional reduction of low
profitability merchant accounts according to KEB’s strategic business repositioning.
Significant special asset monetization actions in connection with the bank’s efforts to strengthen the capital base resulted in a 69.6% YoY increase
to 133.8 billion won in gains from the sale of non-performing loans.

(In Billions of Korean Won)
FY 2005
Operating Trust Acct.
Merchant Acct.
Trading Profit (excl. PUB gain)
PUB sale*
Valuation equity method (excl. KEBCS)
Card sector (excl. NPL sale)
NPL sales
Others
Total

24.7
13.8
51.3
45.6
-24.6
133.8
27.6
272.1

4Q

3Q
6.6
3.5
11.7
15.3
-4.1
12.2
15.0
60.2

*This gain was occured from the sale of Pacific Union Bank, KEB’s U.S. subsidiary, in 2004.

28

2Q
5.5
3
18
13.4
-8.2
30.0
-3.2
58.6

FY 2004

1Q
6.6
3.2
7.3
10.5
-4.9
37.4
12.0
71.9

6.1
4.1
14.4
6.4
-7.5
54.1
3.8
81.4

27.7
20.4
56.0
181.1
43.3
-212.2
78.9
-33.8
161.4

YoY
-11.0%-32.3%-8.4%
Not comparable+5.3%
F.
+69.6%
F.
+68.6%

MANAGEMENT DISCUSSION & ANALYSIS

6) G & A Expense
A staff rationalization in 2004 enabled KEB to post only a modest increase in salaries in 2005. However, employee benefits were significantly
higher due to special performance bonuses in conjunction with the bank’s outstanding business performance and large gains from special asset
sales.
Operating expenses increased by 18.8% compared to 2004, driven primarily by aggressive marketing activities including advertising, branch
expansion and remodeling, etc.
Total operating expenses to total profit ratio showed an increase to 41.2% in 2005 from 39.3% (when applying total income excluding the gain-onsale of PUB) in 2004, maintaining an acceptable level of expenses.
(In Billions of Korean Won)
FY 2005
Salaries & benefits
Salaries
Employee benefits
Operating Expenses
Depreciation
Tax & Dues
Total
Bank
Card

605.4
431.3
174.2
237.4
114.8
37.7
995.3
900.0
95.2

4Q
216.7
123.5
93.3
70.1
33.4
13.6
333.7
306.9
26.8

3Q

2Q

135.9
104.1
31.8
56.7
29.2
10.2
231.9
210.0
21.9

127.7
103.6
24.1
61.4
28.1
6.6
223.7
200.6
23.2

FY 2004

1Q
125.1
100.1
25.0
49.3
24.1
7.2
205.9
182.5
23.3

501.0
400.9
100.1
199.8
113.7
32.5
847.0
756.9
90.1

YoY
+20.8%+7.6%+73.9%+18.8%+1.0%+16.0%+17.6%+18.9%+5.7%

7) Provisions, Tax Expenses, etc.
Provisioning for bad debts fell to 61.6 billion won, a decrease of 92.3% from the previous year, due primarily to the normalization of bad assets
and steady improvement in asset quality.
During 4Q2005, a change in the reserve policy set by the Financial Supervisory Service required additional provisions to be included in reserves.
Provisions requirement subject for guarantees & acceptances was expanded and resulted in an additional 20 billion won to be included in theprovisions for bad debts. A provisioning requirement for unused commitment was also incorporated and resulted in an extra of 84 billion won inother reserves account.
The corporate tax sector was affected by deferred income tax asset recognition, resulting in a deferred income tax profit of 300.6 billion won.

(In Billions of Korean Won)
FY 2005
Loan Loss Provisioning
Bank
Corporate
Household
Card
Retirement Allowance
Other Provisioning
Income Tax expenses
Total

61.6
28.4
-0.9
29.3
33.2
60.4
101.3
-294.1
-70.9

4Q
7.5
2.2
-3.9
6.1
5.3
17.3
87.5
-298.9-186.6

3Q

2Q
8.2
-0.2
-3.8
3.6
8.4
14.1
3.7
1.8
27.7

10.9
-7.2
-22.3
15.1
18.0
7.6
3.3
1.4
23.1

FY 2004

1Q
35.0
33.6
29.1
4.5
1.5
21.5
6.8
1.6
64.8

804.9
136.5
66.2
70.3
668.3
54.2
54.4
9.5
923.0

YoY
-92.3%-79.2%
F.
-58.4%-95.0%+11.4%+86.2%F.
F.

4. Assets & Liabilities (Bank Account)1) Assets
Total assets (excluding trust assets) at the end of 2005 were 64.9 trillion won, a 6.0% increase from 61.3 trillion won from at the end of 2004.
Total loans increased to 40.9 trillion won, an increase of 4.1% from the previous year. Loan growth was mainly attributable to the increase inhousehold and corporate loans, offsetting the decrease of credit card receivables.

28
29

MANAGEMENT DISCUSSION & ANALYSIS

Total securities increased to 12.9 trillion won at the year end 2005, an increase of 5.8% from the previous year. A significant increase in 1Q2005
has been relieved by the disposal of low-yield securities and debt-to-equity-swapped stocks.
(In Billions of Korean Won)

Cash & Due from Banks
Securities
Loans & Discounts
Credit Card Receivables
Other Asset
Merchant Banking Accounts
Total Assets

2005.122005.09

2005.06

2005.03

2004.12YoY

2,880.7
12,879.2
40,922.0
2,260.5
7,152.2
1,116.9
64,951.0

3,376.6
12,884.9
40,308.3
2,160.9
7,882.9
1,306.065,758.8

3,206.2
13,896.6
39,295.7
2,242.3
8,686.7
1,395.0
66,480.3

3,574.7
14,562.5
38,012.5
2,396.2
8,668.9
1,270.9
66,089.5

2,584.2
12,172.8
39,304.5
2,620.0
6,082.6
1,157.5
61,301.6+11.5%+5.8%+4.1%-13.7%+17.6%-3.5%+6.0%2) Liabilities & Shareholders’ Equity
Deposits declined to 38.0 trillion won, a decrease of 1.4% from the previous year, reflecting KEB’s pricing discipline, and targeted customer
segmentation marketing efforts. Financial debentures also decreased to 5.9 trillion won, slipping 8.5% from the previous year. However, these
decreases were offset by an increase of 10.5% in borrowings.
Total shareholders’ equity increased to 5.7 trillion won in 2005 from 2.9 trillion won in 2004, a 93.1% YoY increase, driven primarily by growth inretained earnings.
(In Billions of Korean Won)

Deposits
Borrowings
Debentures
Other liabilities
Merchant Banking Acct.
Shareholders’ Equity
Liabilities & Shareholders’ Equity

2005.122005.09

2005.06

2005.03

2004.12

YoY

38,009.5
6,740.4
5,930.7
7,522.6
1,090.1
5,657.7
64,951.0

38,336.8
7,245.8
5,440.4
9,448.4704.1
4,583.3
65,758.8

39,924.5
6,531.2
5,697.5
9,200.1
1,267.5
3,859.5
66,480.3

38,282.5
7,030.1
6,099.9
10,353.5
870.9
3,452.7
66,089.5

38,537.9
6,097.7
6,480.8
6,187.7
1,068.1
2,929.4
61,301.6-1.4%+10.5%-8.5%+21.6%+2.1%+93.1%+6.0%

3) Korean Won-currency Loans
The KRW-currency loan portfolio as of end-2005 consisted of 49.5% for companies (SMEs: 41.3%, Large Corps.: 8.2%), 43.0% for households,
7.2% for credit cards, and 0.3% for others.
SME lending has shown a steady increase of 8.2% with focuse on export/import-oriented and high-quality companies. Although loan demand
from large corporations has remained generally flat, there has been a minor upswing in the volume of loans to large corporations. Householdloans have seen a significant increase of 11.0% with growth in both mortgage-related loans and personal loans to higher-grade customers andspecialized professionals.
In 2005, bad asset write-offs, restructuring of high-risk accounts, and the near complete run off of the book of rewritten accounts in the card
sector resulted in a decline of credit card receivables to 2.3 trillion won in 2005 from 2.6 trillion won in 2004. However, for the first time since themerger of the credit card subsidiary in 2004, the bank’s credit card receivables began to achieve net growth after reaching a low of 2.2 trillion won
in 3Q2005.
(In Billions of Korean Won)

Household loan
Housing-related
Corporate
SMEs
Large Corp.
Public & others
Sub total
Credit Card Receivables
Total
30

2005.122005.09

2005.06

2005.03

2004.12

13,488.5
8,770.4
15,493.0
12,938.1
2,554.9
90.8
29,072.3
2,260.5
31,332.7

13,102.1
8,727.2
14,885.0
12,304.1
2,580.9
67.9
28,055.1
2,160.9
30,216.0

12,669.8
8,535.9
14,242.7
11,984.8
2,257.9
82.9
26,995.3
2,242.3
29,237.6

12,226.3
8,308.5
14,422.9
12,159.4
2,263.6
112.2
26,761.4
2,396.2
29,157.6

12,153.1
8,279.6
14,229.3
11,962.7
2,266.5
116.2
26,498.6
2,620.0
29,118.6

YoY+11.0%
+5.9%
+8.9%
+8.2%
+12.7%-21.9%+9.7%-13.7%+7.6%

MANAGEMENT DISCUSSION & ANALYSIS

4) Foreign Exchange & Trade FinanceIn 2005, the bank handled 25% and 27% of the nation’s total export and import transaction volume, respectively, while maintaining its leading
share in F/X with 46% of transactions conducted by Korea’s eight leading commercial banks. These leading market shares demonstrate that, inthe midst of tough competition environment, the bank’s capabilities and brand power continues to bolster its strong presence and leadership in
the nation’s F/X and trade finance markets.

FX Market Share(%)

Export Market Share(%)

Import Market Share(%)

25%

27%

46%

KEB

OthersKEB

OthersKEB

Others

5. Asset Quality
1) Asset Classification
Through prudent credit risk management, KEB has achieved significant improvement in its asset quality and is now in the best shape in its
history.
The NPL ratio was dramatically reduced to 0.90% in 2005 from 1.82% in 2004, a decrease of 0.92%p. The Precautionary & Below Ratio also
declined to 1.95% in 2005 from 3.75% in 2004, a decrease of 1.62%p.
Through the reduction of non-performing loans and sufficient provision accumulation, the NPL coverage ratio jumped to 157.3% in 2005 from108.8% in 2004. Precautionary & below coverage ratio has also increased to 72.2% in 2005 from 55.3% in 2004.

(In Billions of Korean Won)
2005.12
NormalPrecautionary
Substandard
Doubtful
Estimated Loss
Total Credits
Substandard & Below (NPL) (%)
Precautionary & Below (%)
Loan Loss Reserve
NPL Coverage (%)
Precautionary & Below Coverage (%)

42,628.0
458.3
229.8
91.5
67.9
43,475.5
0.90%
1.95%
612.1
157.3%
72.2%(Excl. Card)
40,370.0
367.2
229.8
34.8
60.7
41,062.5
0.79%
1.69%
513.2
157.8%
74.1%

2005.0941,800.5
495.5
326.5
45.0
60.9
42,808.9
1.20%
2.36%
647.2
126.2%
64.2%(Excl. Card)
39,711.2
384.9
326.5
45.0
60.9
40,528.5
1.07%
2.02%
531.0
122.8%
65.0%

2005.06
40,700.4
582.8
311.9
151.9
90.3
41,837.3
1.32%
2.72%
687.0
124.0%
60.4%(Excl. Card)
38,647.5
443.5
311.9
56.5
82.7
39,542.1
1.14%
2.26%
544.8
60.9%
60.9%

2005.03
40,102.5
628.6
330.6
265.6
109.1
41,436.4
1.70%
3.22%
764.6
108.4%
57.3%(Excl. Card)
37,983.2
449.8
330.6
138.3
84.9
38,986.8
1.42%
2.57%
571.6
103.22%57.0%

2004.1240,044.4
729.7
414.1
228.3
112.5
41,529.0
1.82%
3.57%
821.4
108.8%
55.3%(Excl. Card)
37,670.3
505.1
414.0
66.0
99.1
38,754.5
1.49%
2.80%
576.4
99.5%
53.2%

2) Delinquency
The delinquency ratio in 2005 reached a record low level of 0.93% compared to 1.78% in 2004, a decrease of 0.86%p. Solid credit management
resulted in consistent lower new delinquency formation.

30
31

MANAGEMENT DISCUSSION & ANALYSIS

Another major highlight was the substantially improved and normalized delinquency ratio for credit cards to 4.30% in 2005 compared to 7.62% in
2004. This improvement resulted primarily from bad asset write-offs, as well as high-risk account restructuring on cash advances and cardloans.

(In Billions of Korean Won)
Reported basis
Bank
Household
SME
Large corp./ Others
Card
Normal bookRe-aged bookTotal delinquency ratio

2005.12
0.71%
1.01%
0.77%
0.19%
4.30%
4.00%
13.23%
0.93%

2005.09
1.18%
1.24%
1.72%
0.29%
5.17%
4.69%
15.24%
1.41%

2005.06
1.01%
1.25%
1.22%
0.35%
6.43%
5.73%
17.60%
1.32%

2005.03
1.45%
1.85%
1.86%
0.28%
7.91%
6.92%
20.88%
1.86%

2004.12
1.34%
1.60%
1.40%
0.89%
7.62%
6.96%
14.65%
1.78%

YoY-0.62%p-0.58%p-0.63%p-0.70%p-3.33%p-2.96%p-1.42%p-0.86%p

6. Capital Adequacy
At the year end 2005, the BIS capital ratio stood at 13.68% compared to 9.47% of year end 2004, an increase of 4.21%p. Tier I ratio for 2005 was
9.65% compared to 5.51% for 2004; Tier II ratio for 2005 was 4.04% compared to 3.96% for 2004. The record high net income contributed to thebank’s capital expansion. KEB has achieved the strongest capital position in the Korean banking industry in both quantity and quality of capital.

(In Billions of Korean Won)
4Q 2005
Tier I
Paid in Capital
Capital Surplus
Retained Earnings
Outside Shareholder's Equity
Hybrid Tier I
Deferred Income Tax Debits (-)
Cost of Issuing New Shares (-)
Other Intangible Fixed Assets (-)
Loss on Valuation of Investment Securities (-)
Tier II
Upper Tier II
Loan Loss Reserve
45% of Gain on Valuation of Investment Securities
Subordinated Debts
Others (-)
Total Qualifying Capital
Risk Weighted Asset (Including Market Risk)
BIS Ratio
Tier I Ratio
Tier II Ratio

32

4,374.8
3,224.5
1,358.9
1.1
250.0
6.6
310.3
84.5
58.4
2,036.2
529.5
655.8
850.9
205.8
6,205.1
45,351.8
13.68%
9.65%
4.04%

3Q 2005
3,617.9
3,224.5
601.2
1.1
250.0
6.9
314.6
87.0
50.5
1,950.7
491.1
511.2
948.4
150.0
5,418.7
44,510.9
12.17%
8.13%
4.05%

2Q 2005
3,125.8
3,224.5
79.1
8.8
250.0
6.7
316.3
88.0
25.7
1,839.9
497.6
398.6
943.8
149.6
4,816.1
43,490.0
11.07%
7.19%
3.89%

1Q 2005
2,585.1
3,224.5-242.2
8.5
250.0
210.0
316.1
91.4
38.2
1,719.2
204.9
517.0
360.9
636.5
116.3
4,188.0
42,522.0
9.85%
6.08%
3.77%

4Q 2004
2,316.2
3,224.5-567.3
8.4
250.0
207.9
317.2
43.2
31.0
1,798.0
208.8
510.7
281.3
797.3
131.6
3,982.7
42,055.8
9.47%
5.51%
3.96%

YoY
+88.9%+0.0%-339.5%-86.3%
0.0%-96.8%-2.2%+95.4%+88.4%+13.2%-100.0%+3.7%+133.1%+6.7%+56.4%+55.8%+7.8%+4.21%p+4.14%p+0.07%p

KOREA EXCHANGE BANK (BANKING ACCOUNT)NON-CONSOLIDATED INDEPENDENT AUDITORS’ REPORT

Independent Auditors’ Report
Based on a report originally issued in Korean

To the Board of Directors and Shareholders of Korea Exchange Bank:
We have audited the accompanying non-consolidated balance sheet of Korea Exchange Bank (the “Bank”) as of December 31, 2005 and 2004, and therelated non-consolidated statements of income, appropriation of retained earnings and cash flows for the years then ended, expressed in Korean
Won. These financial statements are the responsibility of the Bank’s management. Our responsibility is to issue a report on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the non-consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Bank
as of December 31, 2005 and 2004, and the results of its operations, the appropriation of its retained earnings, and its cash flows for the years thenended in conformity with accounting principles generally accepted in the Republic of Korea.
Without qualifying our opinion, we draw attention to the following:
As discussed in note 2(a) to the accompanying non-consolidated financial statements, accounting principles and auditing standards and theirapplication in practice vary among countries. The accompanying non-consolidated financial statements are not intended to present the financial
position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the
Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from thosegenerally accepted and applied in other countries. Accordingly, this report and the accompanying non-consolidated financial statements are for use
by those knowledgeable about Korean accounting procedures and audit standards and their application in practice.
As discussed in note 20(f) to the accompanying non-consolidated financial statements, the Bank’s outstanding loans (including payment guarantees)
and available-for-sale securities with respect to Hynix Semiconductor Inc. (“Hynix”) amount to 178,886 million and 1,426,115 million, respectively
as of December 31, 2005 and the loans are classified as the normal according to the loan classification. As a result, the joint management agreement
was terminated on July 12, 2005. In addition, the Bank sold 18,416,307 shares of Hynix, which is permitted to sale in over-the-counter market by
Financial Institution Creditors Committee, at 350,146 million on October 26, 2005.
As discussed in note 4(h) to the accompanying non-consolidated financial statements on February 18, 2005, the Bank sold whole shares (2,760
thousand shares) of KEB Commerz Investment Trust Management Co., Ltd., a domestic subsidiary of the Bank, to Landmark Investment TrustManagement Co., Ltd. for 28,043 million.

KPMG Samjong Accounting Corp.
Seoul, Korea
January 26, 2006

This report is effective as of January 26 2006, the audit report date. Certain subsequent events or circumstances, which may occur between the audit
report date and the time of reading this report, could have a material impact on the accompanying non-consolidated financial statements and notes
thereto.
Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect
the impact of such subsequent events or circumstances, if any.

32
33

KOREA EXCHANGE BANK (BANKING ACCOUNT)NON-CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004

(In millions of Won, except share data)
2005

2004

AssetsCash and due from banks (notes 3, 15, 30 and 31)

2,880,698

2,584,193

Securities (notes 4, 15 and 31)

12,879,222

12,172,759

40,921,935

39,304,541

Loans, less allowance for loan losses of

566,995 in 2005 and871,228 in 2004, less net deferred loan fees and costs of
2,667 in 2005 and1,271 in 2004 (notes 5, 15, 30 and 31)

Fixed assets, less accumulated depreciation of
and663,079 in 2005

617,575 in 2004 (notes 6 and 16 )Other assets (notes 7 and 30)

938,342896,696

6,213,875

5,185,894

Merchant banking account assets (notes 8 and 15)

1,116,904

1,157,504

Total assets

64,950,976

61,301,587

38,009,508

38,402,164

Liabilities and Shareholders’ Equity

Liabilities:
Deposits (notes 9, 15, 30 and 31)
Borrowings (notes 10, 15, 30 and 31)

6,740,402

6,233,438

Debentures (notes 11, 15 and 31)

5,930,704

6,480,781

Other liabilities (notes 12, 15 and 30)

7,522,612

6,187,726

Merchant banking account liabilities (note 13)

1,090,081

1,068,088

Total liabilities

59,293,307

58,372,197

3,224,534

3,224,534

Shareholders’ equity (note 1):
Common stock of

5,000 par value:

Authorized- 1,000,000,000 shares
Issued- 644,906,826 shares in 2005 and 2004
Other statuary reserves (note 17)34,96530,694Retained earnings (accumulated deficit) (notes 16 and 17)

1,287,380(634,186)

Capital adjustments (note 18)

1,110,790

308,348

Total shareholders’ equity

5,657,669

2,929,390

64,950,976

61,301,587

Commitments and contingencies (note 20)
Total liabilities and shareholders’ equity

34

See accompanying notes to non-consolidated financial statements.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NON-CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2005 and 2004

(In millions of Won)
2005

2004

Operating revenue:
Interest income (notes 30 and 31):
Interest on due from banks

25,976

Interest on trading securities

36,46819,202

Interest on available-for-sale securities

305,259

405,813Interest on held-to-maturity securities
Interest on loans
Other interest income

23,211109,171

96,2752,768,942

2,791,603

20,772

23,206

3,266,588

3,359,310

412,400

441,693

Gain on disposition of trading securities

82,814

48,114Gain on valuation of trading securities

7,912

4,618

Dividend on trading securities

1,350

1,332

Dividend on available-for-sale securities

7,965

4,107

Gain on derivatives trading and foreign currency exchange (note 20)

2,646,299

2,530,062

Trust fees and commissions received from trust account (note 32)

24,712

27,682Fees and commissions (notes 22 and 30)
Other operating revenue:

Reversal of allowance for acceptances and guarantees-

35,11663,00072,8052,834,052

2,723,836

6,513,040

6,524,839

Interest on deposits

935,327

1,036,313

Interest on borrowings

209,208

157,174

Interest on debentures

333,993431,456

Other interest expenses

17,402

15,1791,495,930

1,640,122

208,759

202,916

Loss on disposition of trading securities

49,551

27,998Loss on valuation of trading securities

6,878

877

2,402,002

2,247,405

Provision for loan losses (note 5)

41,955840,235

Provision for allowance for acceptances and guarantees

21,625-

Deposit insurance premium and contribution to credit guarantee fund

100,813101,207

Operating revenue of merchant banking account (note 23)

Total operating revenue
Operating expenses:
Interest expenses (notes 30 and 31):

Commission charges (notes 24 and 30)
Other operating expenses:

Loss on derivatives trading and foreign currency exchange (note 20)

Loss on obligation to return securities with repurchase agreement
Provision for other liabilities
Other operating expenses of merchant banking account (note 25)

General and administrative expenses (note 26)
Total operating expenses
Operating income

678-

101,295

57,43349,512

52,0432,774,309

3,327,198

1,055,675

901,250

5,534,673

6,071,486

978,367

453,353

34
35

KOREA EXCHANGE BANK (BANKING ACCOUNT)NON-CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2005 and 2004

(In millions of Won, except earnings per share data)
2005

2004

Non-operating income:Gain on disposition of available-for-sale securities

473,976

287,530

Equity earnings from affiliates (note 4)

45,70844,988Recovery of impairment losses on available-for-sale securities (note 4)

58,727

1,431

Recovery of impairment losses on held-to-maturity securities (note 4)

39,667-

Gain on disposition of loans

23,13750,158Gain on disposition of written-off loans

124,646

28,780Rental revenue

2,315

2,728

Others31,981

39,779800,157

455,394-

113,203

Non-operating expenses:
Equity loss on from affiliates (note 4)
Impairment losses in investments in affiliates (note 4)

850-

Impairment losses on available-for-sale securities (note 4)

84,24879,527

Impairment losses on held-to-maturity securities (note 4)

27,18525,353

Loss on disposition of available-for-sale securities

6,707

6,458

Loss on disposition of tangible assets

2,400

725

Loss on disposition of loans

14,027

85

Others

24,671

169,553

160,088394,904

Ordinary income

1,618,436

513,843

Extraordinary gain

16,69017,675

Earnings before income taxes

1,635,126

531,518

Income taxes (tax benefits) (note 27)(294,201)

9,451

Net income

1,929,327

522,067

Basic

2,966

783

Diluted

2,964

783

Ordinary earnings per share (note 28)

Earnings per share (note 28)

36

Basic

2,992

811

Diluted

2,990

811

See accompanying notes to non-consolidated financial statements.

KOREA EXCHANGE BANK (BANKING ACCOUNT)STATEMENTS OF APPROPRIATION (DISPOSITION) OF RETAINED EARNINGS (ACCUMULATED DEFICIT)
Years ended December 31, 2005 and 2004

Date of Appropriation for 2005: March 29, 2006
Date of Disposition for 2004: March 28, 2005
(In millions of Won)
2005

2004

Unappropriated (undisposed) retained earnings(accumulated deficit):
Balance at beginning of year

(642,268)(344,482)

321

(73)

Investment securities in subsidiaries accounted
for using equity method
Accumulated deficit transferred due to the merger-(811,698)

Net income

with Korea Exchange Bank Credit Card Service Co., Ltd.

1,929,327

522,067

Balance at end of year before appropriation (disposition)

1,287,380(634,186)

21-

1,287,401(634,186)

4,322

8,082

324,854-

329,176

8,082

958,225(642,268)

Transfer from voluntary reserves:

Other statuary reserves

Unappropriated retained earnings available
for appropriation (disposition)

Appropriation (disposition) of retained earnings(accumulated deficit):
Other Statuary reserves
Amortization of discounts on capital stock

Unappropriated (undisposed) retained earnings (accumulated
deficit) to be carried over to subsequent year

See accompanying notes to non-consolidated financial statements.

36
37

KOREA EXCHANGE BANK (BANKING ACCOUNT)NON-CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2005 and 2004

(In millions of Won)
2005

2004

Cash flows from operating activities:
Net income

1,929,327

522,067(1,034)(3,741)Gain on disposal of available-for-sale securities, net(467,269)(281,072)

Impairment losses on available-for-sale securities, net

25,521

78,096on held-to-maturity securities, net(12,482)

25,353Equity loss (earnings) from affiliates, net(44,858)

68,215Gain on disposal of loans, net(9,110)(50,073)

Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Gain on valuation of trading securities, net

Impairment losses and recovery of impairment loss

Loss on disposal of tangible assets, net
Loss (gain) on valuation of derivatives, net

916

587

(51,888)

101,366

Deferred losses on foreign currency translation, net

4,457

1,364

Loss (gain) on derivatives trading and foreign exchange, net

3,165(25,898)

Provision for other liabilities

101,295

57,433

Amortization of debt securities purchased with premiums, net(13,329)

26,371

Provision for loan losses

41,955840,235

Depreciation and amortization

114,967

115,852

Provision of retirement and severance benefits

60,37554,233

Stock option compensation costs

8,531

6,492

Reversal of allowance for loan losses in merchant banking account(1,973)(242)

Provision (reversal) of allowance for acceptances and guarantees

21,625(35,116)

Amortization of present value discounts(9,280)(13,825)

Gains from liabilities exempted(16,690)(16,175)

Income tax benefits(300,553)-

Gain on disposition of lease assets, net(5,309)(174)

Gain from trading of bills, net(2,185)-

Changes in assets and liabilities:
Decrease (increase) in accrued income(63,127)47,082

Increase in trading securities(450,451)(365,979)

Decrease (increase) in prepaid expenses

31,711(10,622)

Increase (decrease) in accrued expenses(125,807)

104,288

Increase (decrease) in unearned income

3,144(17,167)

Decrease in accrued income tax expenses(1,038)(1,883)

Increase in deferred tax assets-(3,866)

Payment of severance benefits(7,247)(40,071)

Decrease in transfer to National Pension Fund

38

12

773

Increase in deposit of insurance for retirement and severance benefits(41,816)(19,647)

Exercise of stock options(1,221)-

Net cash provided by operating activities

720,334

1,164,256

KOREA EXCHANGE BANK (BANKING ACCOUNT)NON-CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Years ended December 31, 2005 and 2004

(In millions of Won)
2005

2004

Cash flows from investing activities:
Decrease in available-for-sale securities

2,293,462

792,829

Decrease (increase) in loans(1,635,222)

1,585,807(570,434)(601,404)

16,716443,611

Increase in held-to-maturity securities
Decrease in equity securities under the equity method of accounting
Purchase of fixed assets(157,351)(128,396)

Decrease in other assets

2,521,003

2,127,146

36,936

488,7812,505,110

4,708,374(375,966)(4,070,167)

Proceeds from (repayment of) borrowings

506,964(1,514,054)

Proceeds from (repayment of) debentures(550,077)

375,197(2,379,677)(2,612,986)

30,797(570,887)-(19)(2,767,959)(8,392,916)

457,485(2,520,286)

Decrease in merchant banking account assets

Net cash provided by investing activities

Cash flows from financing activities:
Decrease in deposits

Decrease in other liabilities
Increase (decrease) in merchant banking account liabilities
Payment of stock issuance costs

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents
Transfer due to the merger-

28,718Cash and cash equivalents at beginning of year

2,593,524

5,085,092

Cash and cash equivalents at end of year (note 29)

3,051,009

2,593,524

See accompanying notes to non-consolidated financial statements.

38
39

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(1) Organization and Description of the Bank
Korea Exchange Bank (the “Bank”) was established on January 30, 1967 as a government-invested bank to engage in foreign exchange and thetrade finance business under the Korea Exchange Bank Act, on December 30, 1989, the Korea Exchange Bank Act was repealed and the Bank
was converted into a corporation under the Commercial Code of the Republic of Korea. On April 4, 1994, the Bank was listed on the Korean Stock
Exchange.
The Bank primarily provides commercial banking services, trust banking services, foreign exchange, merchant banking business through themerger with Korea International Merchant Bank (“KIMB”), a domestic subsidiary of the Bank, and other related operations as permitted underthe Bank Act and other relevant laws and regulations in the Republic of Korea.
The merger between the Bank and Korea Exchange Bank Credit Service Co., Ltd. (“KEBCS”) was finalized on February 28, 2004 (see note 34).
The Bank implemented a two-to-one capital reduction on all outstanding shares of common and preferred stock for the purpose of disposition of
accumulated deficit in accordance with a resolution of board of directors on November 10, 2000. In addition, on December 22, 2000, the Bank
increased its capital by issuing 122 million new shares of preferred stock at par value of 5,000 per share in accordance with a resolution ofboard of directors on November 10, 2000.
The Bank entered into a Memorandum of Understanding regarding the Share Subscription Agreement with Lone Star Fund IV on August 27, 2003.
On October 30, 2003, the Bank issued 268,750,000 shares of common stock to LSF-KEB Holdings, SCA at 4,000 per share (at less than its parvalue) in accordance with a resolution during an extraordinary shareholders’ meeting on September 16, 2003. The balance that was below the parvalue was recognized as a discount on stock issued.
In addition, LSF-KEB Holdings, SCA acquired 26,235,923 shares of common stock and 30,865,792 shares of preferred stock from Commerzbank
and Export-Import Bank of Korea, respectively, at 5,400 per share on October 30, 2003. Also, 122 million shares and 26 million shares ofpreferred stock were converted to common stock on December 22, 2003 and April 22, 2004, respectively.
In addition, the Bank issued 5,981,895 shares of common stock of the Bank to the shareholders listed in the stockholders’ list of KEBCS as ofFebruary 28, 2004 according to the merger agreement (see note 34).
As of December 31, 2005 , the total number of authorized shares of the Bank is 1,000 million (par value 5,000) while the paid-in capital amounts
to 3,224,534 million (with 644,907 thousand shares of common stock outstanding with par value of 5,000).
The Bank’s shareholders as of December 31, 2005 and 2004 are as follows:
Number of shares owned

Ownership (%)

LSF-KEB Holdings, SCA

325,851,715

50.53

Commerzbank AG

94,247,389

14.61

Export-Import Bank of Korea

89,448,595

13.87

Bank of Korea

39,500,000

6.12

Others

95,859,127

14.87

644,906,826

100.00

LSF-KEB Holdings, SCA has a right to acquire 41,764,077 shares and 49,134,208 shares of KEB from Commerzbank and Export-Import Bank of
Korea, respectively, through exercising call options by October 31, 2006. LSF-KEB Holdings, SCA is promoting sales of its stake in KEB as ofDecember 31, 2005.
As of December 31, 2005, the Bank has 335 branches, agencies and offices in domestic and overseas markets. The Bank closed eight domestic
branches and agencies and opened ten domestic branches and agencies during 2005. In addition, the Bank sold the domestic subsidiary, KEB
Commerz Investment Trust Management Co., Ltd. (“KEBIT”) on February 18, 2005 (see note 4(h)).

(2) Summary of Significant Accounting Policies
The significant accounting policies followed by the Bank in the preparation of its accompanying non-consolidated financial statements are
summarized as follows:(a) Basis of Presenting Financial Statements
The Bank maintains its accounting records in Korean Won and prepares statutory financial statements in the Korean language (Hangul) inconformity with accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Bank that
conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted40

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 200440
41
accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean
accounting principles and practices. The accompanying non-consolidated financial statements have been condensed, restructured and translated
into English from the Korean language non-consolidated financial statements.
Certain information included in the Korean language financial statements, but not required for a fair presentation of the Bank’s financial position,
results of operations or cash flows, is not presented in the accompanying non-consolidated financial statements.
The accompanying non-consolidated financial statements include only the accounts of the Bank, and do not include the accounts of any of its
consolidated subsidiaries. Instead, these subsidiaries are accounted for under the equity method of accounting (see note 4(b)).
Effective January 1, 2005, the Bank adopted Statements of Korea Accounting Standards (“SKAS”) No. 15 “Investments in Associates”, No. 16“Income Taxes”, No. 17 “Provisions, Contingent Liabilities and Contingent Assets”. As allowed by these standards, prior year balances were notreclassified to conform to the current year presentation.
According to the revision of the Regulation on Supervision of Banking Business, the Bank additionally accrued allowance for estimated potential
losses on unconfirmed guarantees and acceptances, endorsed notes, and confirmed guarantees and acceptances with credit classifications ofnormal and precautionary. Also the Bank accrued allowance for estimated potential losses on unused loan commitments with credit
classification of normal as of December 31, 2005. As allowed by these standards, prior year balances were not reclassified to conform to thecurrent year presentation
Regarding the overseas branches and subsidiaries, the Bank used their financial statements that are prepared in accordance with the financial
accounting standards generally accepted in their locations, except for the cases that have material effect on the Bank’s financial statements, due
to difference of standards in various countries.
Certain accounts of prior year’s financial statements, presented herein for comparative purposes, were reclassified to conform to the current
year’s presentation. These reclassifications did not result in any change to reported net income (losses) or shareholders’ equity.

(b) Recognition of Interest Income
Interest income on due from banks, loans and investments is recognized on an accrual basis, while interest income on overdue and defaulted
loans, not secured by guarantees from financial institutions or collateral deposits, is recognized on a cash basis. As of December 31, 2005 andDecember 31, 2004, the amount of interest not recognized due to such policy approximates 66,885 million and 156,037 million, respectively.
All additional gains during the process of handling loans are deferred and recorded as deduction from the loan amount. Additional expenses withthe future economic profits, which can be classified by individual loans, are also deferred and expressed as addition to the loan amount. Suchgains and expenses are reversed or amortized using effective interest rates and expressed as addition to or deduction from the interest income.

(c) Allowance for Loan Losses
The Bank applied the Forward Looking Criteria (“FLC”) for its loan classification based on the credit rating to determine allowance for loan
losses. Under this method, the borrowers’ future debt repayment capacity as well as their overall financial health and management soundness is
considered in developing the credit rating and the reserve for possible loan losses related to large corporate customers. However, loanclassification for the smaller corporate, retail loan customers and credit card accounts are classified based on the delinquency period, value ofcollateral and bankruptcy status only.
Estimated loan losses as of as of December 31, 2005 and 2004 were determined by applying the following minimum percentages to each credit
risk classification:

Classification

Corporate loans

Retail loans

Normal

0.50%

0.75%

Credit card loans and receivables
1.0%

Precautionary

2.0%

8.0%

12.0%

Substandard

20.0%

20.0%

20.0%

Doubtful

50.0%

55.0%

60.0%

Estimated loss

100.0%

100.0%

100.0%

Until 2004, the Bank had accrued allowance for estimated potential losses on confirmed guarantees and acceptances with credit classifications of
substandard, doubtful and estimated loss. From 2005, according to the revised of Regulation on Supervision of Banking Business, the Bank
established allowance for estimated losses on unconfirmed guarantees and acceptances and endorsed notes as well as confirmed guarantees
and acceptances considering the credit conversion factor based on the new standard of Bank for International Settlements Accord by applying thesame methodology that was used to determine the allowance for loan losses.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

Also, the Bank had accrued allowance for estimated potential losses on unused limit of cash advance of credit card that have been used at least
once in recent one year. However, from 2005, the Bank accrued allowance for estimated potential losses on total unused limit of credit card
including unused limit of cash advance with credit classification of normal. Additionally the Bank accrued allowance for estimated potential
losses on unused loan commitments for corporate and retail loan customers considering the credit conversion factor based on the new standard
of Bank for International Settlements Accord by applying the same methodology that was used to determine the allowance for loan losses.

(d) Securities
Upon acquisition, the Bank classifies certain debt and equity securities into one of the three categories of held-to-maturity, available-for-sale, ortrading securities and such determination should be reassessed at each balance sheet date. Investments in debt securities that the Bank has the
positive intent and ability to hold to maturity are classified as held-to-maturity. Securities that are bought and held principally for the purpose of
selling them in the near term (thus held for only a short period of time) are classified as trading securities. Trading generally reflects active andfrequent buying and selling, and trading securities are generally used to generate profit on short-term differences in price. Investments notclassified as either held-to-maturity or trading securities are classified as available-for-sale securities.
The securities are initially carried at cost, including incidental expenses, determined by using the specific-identification method or movingaverage method.
Trading securities are carried at fair value, with unrealized holding gains and losses included in income. Available-for-sale securities are carriedat fair value, with unrealized holding gains and losses reported as a capital adjustment. Investments in equity securities that do not have readily
determinable fair values are stated at cost. Declines in value judged to be other-than-temporary on available-for-sale securities are charged tocurrent results of operations. Investments in debt securities that are classified into held-to-maturity are reported at amortized cost at thebalance sheet date and such amortization is included in interest income.
Marketable securities are at the quoted market prices as of the period end. Non-marketable debt securities are recorded at the fair values
derived from the discounted cash flows by using an interest rate deemed to approximate the market interest rate. The market interest rate isdetermined by the issuers’ credit rate announced by the accredited credit rating agencies in Korea. Beneficiary certificates are recorded at thefair value determined by the investment management companies.
Impairment losses are recognized in current operations when the recoverable amounts are less than the acquisition cost of equity securities oramortized cost of debt securities. Recognition of unrealized gains and losses is summarized as follows:
Classification
Trading
Available-for-sale:
Debt securities andmarketable equity securities
Non-marketable equity
securities
Held-to-maturity
Investments in affiliates

Valuation method
Fair value
Fair value

Cost
Cost
EquityRecognition of unrealized gains and losses
Current operations
Capital adjustment (except for impairment losses,
which is recognized in current operations)
Impairment losses to net income
Amortized cost
Current operations, retained earnings(accumulated deficit), or capitaladjustments, depending on the source of the gains or losses

On January 1, 2005, the Bank changed its presentation manner to reflect valuation of assets included in its private placement fund to the balance
sheet by classifying it into private placement fund presented as beneficiary certificate, which was previously classified into each fund per their
purpose. Such change in presentation method was retroactively applied to the prior year balance sheet with no effect to the net asset value,
ordinary income and net income.

(e) Investment Securities under the Equity Method of Accounting
Equity securities held for investment in which the Bank is able to exercise significant influence over the investees, are accounted for using theequity method. The Bank’s share in net income or net loss of the investees is reflected in current operations. Changes in the retained earnings,
capital surplus or other capital accounts of the investees are accounted for as an adjustment to retained earnings or to capital adjustments.
Under the equity method of accounting, the Bank does not record its share of losses of affiliate companies when such losses would make theBank’s investment in such entity less than zero. But , the Bank holds other assets such as preferred stock or loans for investee the Bank’s shareof loss of investee remains recorded until such assets are reduced to nil.

42

Any excess in the Bank’s acquisition cost over its share in the investee’s identifiable net assets is considered as goodwill and amortized using thestraight-line method over five years of estimated useful life. If the Bank’s acquisition cost is less than its share in the investee’s net asset value,then the portion of difference caused by the investee’s amortizable non-monetary assets is reversed over the weighted average useful lives ofsuch assets by using the straight-line method, and the remaining resulted from the investee’s unamortizable assets is reversed at theKOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 200442
43
point when disposed or expensed. If the difference between the Bank’s acquisition cost over its share in the investee’s net asset value is resulted
due to the specific assets and liabilities which are evaluated using their fair market values, such difference is accounted for using the investee’s
accounting treatments applied for such assets and liabilities.
Prior to January 1, 2005, upon the sale to affiliates, the Bank fully eliminates the unrealized gain, whereas in the sale to the Bank, the Bank
proportionately eliminates the unrealized gain based on its percentage of ownership. Effective from January 1, 2005, the Bank adopted SKAS No.
15 “Investments in Associates”. In accordance with this standard, gains and losses recorded between the Bank and the affiliates from thetransactions are proportionately eliminated, based on the Bank’s percentage of ownership over the affiliates. In addition, gains and losses fromthe sale to the consolidated subsidiaries are fully eliminated.

(f) Tangible Assets
Tangible assets are recorded at cost, including incidental expenses, except for those revalued under the Asset Revaluation Law, which are statedat the revalued amounts (see note 16). Depreciation is computed using the declining-balance method over the estimated useful lives of therelated assets, except for buildings and leasehold improvements for which depreciation is computed using the straight-line method.
The estimated useful lives of premises and equipment are as follows:
Estimated useful lives
Buildings
Equipment
Leasehold improvements

40 years
4 years
5 years

Routine maintenance and repairs are charged to current operations as incurred. Betterments and renewals enhancing the value or extending theuseful lives of the facilities are capitalized.

(g) Intangible Assets
Intangible assets consist of primarily of software development costs related to the office automation and productivity enhancement. Amounts
capitalized were 60,844 million and 26,409 million in 2005 and 2004, respectively while the amortization costs were 18,642 million and
8,403 million, respectively.

(h) Foreclosed Assets
Foreclosed assets acquired through, or in lieu of, loan foreclosure which are to be sold are initially recorded at their fair value at the date offoreclosure. After foreclosure, the asset is carried at the lower of its carrying amount or fair value determined by its estimated public auction
price.
When the Bank disposes of foreclosed assets in installment sales, in conformity with accounting standard for the Korean banking industry, theproceeds and the sale gain/loss are recognized as receivable - disposition of asset and gain/loss - disposition of asset, respectively.

(i) Discounts on Debentures
Discounts on debentures, including debenture issuance costs, are amortized over the term of the debenture using the effective interest rate
method. Such amortization is included in interest expense.

(j) Retirement and Severance Benefits
Employees and executives who have been with the Bank for more than one year are entitled to lump-sum payment based on the current rate of
pay and the length of service when they leave the Bank. Retirement and severance benefits of 176,136 million and 123,258 million represent
the amount, which would be payable assuming all eligible employees and executives were to terminate their employment on December 31, 2005
and December 31, 2004, respectively. The Bank’s actual payments of severance benefits were 7,247 million (excluding 3,151 million of
additional early retirement payments) and 40,071 million (excluding 89,592 million of additional early retirement payments) in 2005 and 2004,
respectively.
As of December 31, 2005, approximately 74.9% of the severance benefit provision is covered by the employee retirement policies purchased frominsurance companies including Samsung Life Insurance Co., Ltd., under these policies, the employees are the beneficiaries as well as the
Retirement Trust provided by Chohung Bank and other financial institutions.
Through March 1999, under the National Pension Scheme of Korea, the Bank transferred a certain portion of retirement allowances of
employees to the National Pension Fund. The amount transferred will reduce the retirement and severance benefit amount to be payable to theemployees when they leave the Bank and is accordingly reflected in the accompanying non-consolidated financial statements as a reduction fromthe retirement and severance benefit liability. Since April 1999, however, a new regulation applies and such transfers to the National Pension
Fund are no longer required.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(k) Restructuring of Troubled Loans
Troubled loans restructured under work-out plans or other similar restructuring agreements are stated at present value, and the difference
between the nominal amount and present value is accounted for as the allowance for loan losses to the extent available. The remaining
difference is recorded as provision for loan losses. Amortization of these discounts is included in other interest income. Allowance for loan losses
for loans adjusted by above method is calculated based on the nominal amount, net of present value discount.

(l) Discounts on Capital Stock
Discounts on capital stock arising from the payment of stock issuance costs are reported as capital adjustments in shareholders’ equity andamortized within three years through appropriations of retained earnings.

(m) Income Taxes
Income tax on the earnings or losses comprises current and deferred tax. Income tax is recognized in the statement of earnings except to theextent that it relates to items recognized directly to equity, in which case it is recognized in equity.
Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the
expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted at the balance sheet dates.
A deferred tax asset is recognized only to the extent that it is probable that future taxable earnings will be available against which the unused tax
losses and credits can be utilized. Deferred tax assets are reduced to the extent that those are no longer probable that the related tax benefit will
be realized. In addition, deferred income tax assets and liabilities recorded by the foreign branches are included in other assets and liabilities, andcorresponding income tax benefits and expenses are recorded as non-operating income and expenses.

(n) Securities Bought or Sold under Agreements to Resell or Repurchase
Securities bought or sold under resale or repurchase agreements are accounted for as loans or borrowings, respectively. Related income andexpenses are recorded as interest on loans and interest on borrowings, respectively.

(o) Foreign Currency Translation
Foreign currency denominated assets and liabilities are translated into Korean Won at the basic rates in effect at the balance sheet dates, withthe resulting gains and losses recognized currently and included in gains or losses on foreign exchange transactions. The financial statements ofoverseas branches and offices are translated into Korean Won at the basic rates in effect at the balances sheet dates in accordance with thefinancial accounting standards. The exchange rate used to convert U.S. Dollar into Korean Won on December 31, 2005 was 1,013.0:US$1.

(p) Stock Options
The stock option program allows the Bank’s employees to acquire shares of the Bank. The option exercise price is generally fixed at below themarket price of underlying shares at the date of the grant. The Bank values stock options based upon an option pricing model under theminimum value method (under the fair value method as for the stock options granted after December 31, 2003) and recognizes this value as an
expense over the period in which the options vest. When the options are exercised, equity is increased by the amount of the proceeds received,
and the difference between the exercise price and market price is included in compensation cost and credited to the capital adjustment account.
In accordance with the agreement of the board of directors of the Bank, stock options were granted to the executives and the employees of the
Bank.
All stock options granted prior to December 31, 2003, were accounted for using minimum value method using the Black-Scholes model. Effective
on January 1, 2004, the Bank is required to use fair value method using the Black-Scholes model for all new stock options granted after
December 31, 2003 in accordance with Korea Accounting Institute Interpretation 39-35. However, old options granted prior to December 31, 2003
are still allowed to be accounted for using minimum value method using the Black-Scholes model.

(q) Derivatives
Derivative instruments are classified as used for trading activities or for hedging activities according to their transaction purpose. All derivative
instruments are accounted for at fair value with the valuation gain or loss recorded as an asset or liability. Gain or loss from valuation of trading
derivative instruments is reflected in current operations. Fair value hedge accounting and cash flow hedge accounting are applied to thederivative instruments designed to hedge risks meeting certain conditions.
Fair value hedge accounting is applied to a derivative instrument designated as hedging the exposure to changes in the fair value of an asset or aliability or a firm commitment (hedged item) that is attributable to a particular risk. The gain or loss both on the hedging derivative instruments
and on the hedged item attributable to the hedged risk is reflected in current operations. Cash flow hedge accounting is applied to a derivative
instrument designated as hedging the exposure to variability in expected future cash flows of an asset or a liability or a forecasted transactionthat is attributable to a particular risk. The effective portion of gain or loss on a derivative instrument designated as a cash flow hedge is recorded
as a capital adjustment and the ineffective portion is recorded in current operations. The effective portion of gain or loss recorded as a capitaladjustment is reclassified to current earnings in the same period during which the hedged forecasted transaction affects earnings, or is added toor deducted from the book values of the related assets or liabilities at the time when the hedged forecasted transaction actually incurs.
44KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 20044445(r) Trust Fees and Compensation to the Trust Accounts
The Bank receives trust fees, ranging from 0.2% to 2.0% of the trust’s principal, from the trust accounts as compensation for its management oftrust assets and operations. The Bank is also entitled to receive special trust fees from certain trust accounts with a guaranteed minimum rateof return in accordance with the relevant laws and regulations applicable to trust operations. The bank’s trust fees received from trust account in2005 and 2004 are 24,712 million and 27,682 million, respectively.
Under the Trust Business Act, reserves for future losses are set up in the trust accounts for losses related to those trust funds with a guaranteeof the principal or of a certain minimum rate of return. The reserves are used for future losses on such trust funds and, if the losses are incurredin excess of the reserves for future losses, the excess losses are compensated by the banking accounts. Accordingly, the banking accounts
recognize the compensation paid as losses due to the trust accounts. However, there has been no losses related to the trust accounts in 2005 and2004.

(s) Merchant Banking Accounts
As permitted by the Restructuring of Financial Institutions Act, the Bank may continue its merchant banking operations, including leasing
business, until the existing contracts acquired from Korea International Merchant Bank upon merger are terminated. Significant accounting
policies applied to the Bank’s merchant banking operations are summarized as follows:- Revenue Recognition on Discounted Notes
Interest income on discounted notes is accrued over the term of the notes. Income from the sale of discounted notes is recognized at the date ofsale based on the difference between the purchase and sales prices of the notes, adjusted for interest earned during the holding period.
- Cash Management Accounts (“CMA”)
The Bank recognizes interest income from CMA investments and interest expense from CMA deposits as other income and other expenses,
respectively.
- Lease Transactions
The Bank accounts for lease transactions as operating or financing leases, depending upon the terms of the lease contracts. In general, noncancelable leases are recognized as financing leases when ownership transfers at expiration of the lease term, when a bargain purchase option
exists, or when the lease term exceeds the estimated economic life of the related asset.
Under the financing lease method, aggregate lease rentals are recorded as financing leases receivable, net of unearned interest, based on theexcess of rental revenue over the cost of the related assets. Unearned interest is recognized as interest income on financing leases using theeffective interest method over the lease term. Operating lease equipment is stated at cost and depreciated over the lease term. Operating lease
income is recognized as operating income on an accrual basis over the lease term.
The Bank capitalized interest costs on debt borrowed to finance the purchase of lease assets as part of the cost of such assets prior to theassets being ready for lease.
Foreign currency translation gains or losses incurred from foreign currency borrowings used to finance purchases of operating leaseequipment have been deferred and amortized over the period that the related lease rental revenues are recognized.

(t) Earnings Per Share
Basic earnings per share is computed using the weighted-average number of common stock outstanding during the each period. Diluted
earnings per share is based on an increased number of shares that would be outstanding assuming conversion of potentially dilutive securities.

(u) Cash Equivalents
The Bank considers short-term financial instruments with maturities of three months or less at the acquisition date to be cash equivalents.

(v) Contingent Liabilities
Contingent losses are generally recognized as a liability when probable and reasonably estimable. Effective January 1, 2005, the Bank adopted
SKAS No. 17 “Provisions, Contingent Liabilities and Contingent Assets”. This new standard is consistent with the Bank’s previous
policy.

(w) Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in Republic of Korea requires the Bank’s
management to make estimates and assumptions that affect the amounts reported in financial statements and related notes to financial
statements. Some of the more significant estimates include valuation of loans, securities, deferred tax assets, contingent liabilities andderivatives. Actual results may differ from those estimates.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(3) Cash and Due from Banks
Cash and due from banks as of December 31, 2005 and 2004 are as follows:(In millions of Won)
Interest rate (%)
at 2005.12.31
Cash on hand
Foreign currencies
Due from banks in Won:
Reserve deposit with the Bank of Korea
Deposits with other banks
Deposits with other financial institutions
Due from banks in foreign currencies:
Reserve deposit with the Bank of Korea
Deposits with other financial institutions
Deposits with overseas financial
institutions

2005

2004
1,396,406
261,806

1,266,966
240,4082.30 ~ 5.55
0 ~ 4.03

177,818
196,973
37,326412,117

237,045
96,4302,763
336,238

0 ~ 4.50

191,394
10,672

226,344
1,570

0 ~ 4.50

608,303810,369
2,880,698

512,667
740,5812,584,193

Due from banks restricted in use as of December 31, 2005 and 2004 are summarized as follows:(In millions of Won)2005
Due from banks in Won:
Reserve deposits with the Bank of Korea
Other deposits
Due from banks in foreign currencies:
Reserve deposits with the Bank of Korea
Other deposits

2004

Reference

177,818
81,477259,295

237,045
70,674
307,719

Required underthe Banking Act

191,394
12,191
203,585
462,880

226,344
15,472
241,816
549,535

Required underthe Banking Act

The scheduled maturities of due from banks as of December 31, 2005 are as follows:(In millions of Won)
Due from banks andfinancial institutions
in WonDue in less than one year
Due from one to two years
Due from two to three years
Due from three to five years
Due after five years

46

330,641
81,476412,117

Due from banks andfinancial institutions
in foreign currencies
808,935
1,434
810,369

Total
1,139,576
1,434
81,476
1,222,486

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

46
47(4) Securities
Securities as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Equitysecurities

Debt
securities
Trading
Available-for-sale
Held-to-maturity
Investments underthe equity method

Total

Debt
securities

2004
Equitysecurities

Total

1,121,295
6,466,487
2,208,463

78,9652,656,912-

1,200,260
9,123,399
2,208,463

699,056
8,078,307
1,463,988

49,7181,552,755-

748,774
9,631,062
1,463,988

9,796,245

347,100
3,082,977

347,100
12,879,222

10,241,351

328,935
1,931,408

328,935
12,172,759(a) Debt Securities
Debt securities as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005

Trading:
Government bonds
Finance debentures
Beneficiary certificate
Bonds in foreign
currencies
Available-for-sale:
Government bonds
Finance debentures
Corporate bonds
Beneficiary certificates
Other securities
Bonds in foreign
currencies (*3)
Off-shore debt
securities
Held-to-maturity:
Government bonds
Finance debentures
Corporate bonds
Other securities
Bonds in foreign
currencies

Annualinterest
rate (%)

Nominalamount2.50~10.17
3.68~9.10-

2004

Acquisition
cost

Adjustedacquisition
cost(*1)

Fairvalue(*2)

NominalamountAcquisition
cost

Adjustedacquisition
cost(*1)

Fairvalue(*2)

56,141
1,031,360
20,00055,814
1,028,278
20,00055,8101,028,720
20,00055,306
1,024,605
24,242

140,549
528,135
10,000143,341
529,030
9,948

143,186
528,793
10,176

143,500
530,556
10,4252.79~5.5

17,1401,124,641

17,122
1,121,214

17,065
1,121,595

17,142
1,121,295

14,613
693,297

14,516
696,835

14,517
696,672

14,575
699,056

3.00~10.89
3.20~7.65
3.43~5.74-

2,475,598
2,600,000
699,000
272,577
90,4042,505,849
2,588,807
699,081271,594
90,403

2,485,350
2,588,439
679,161
271,594
41,7952,452,868
2,563,835
614,698
272,577
41,5402,775,151
3,249,500
592,146
892,605
88,694

2,822,924
3,230,235
595,058
892,533
88,6942,806,065
3,226,887
576,931
892,205
52,6122,806,093
3,243,873
564,240
892,605
46,9790~7.63533,180

527,550

523,842

520,969554,295

548,729584,216

524,486-

3,039
6,673,798

3,039
6,686,323

6,590,181

6,466,487

8,350
8,160,741

4,254
8,182,427

31
8,138,947

31
8,078,3072.50~6.67
4.20~8.00
4.00~9.02-

924,852
357,000
432,800
1,990

922,263360,556
338,130
1,971

924,534
359,067
350,020
1,971

924,534
359,067
350,020
1,971

510,114254,000
392,886
2,290

511,248
256,920394,109
2,272

513,526
256,571
323,414
2,272

513,526
256,571
298,0622,272

0~7.63570,0032,286,645
10,085,084

577,541
2,200,461
10,007,998

573,650
2,209,242
9,921,018

572,871
2,208,463
9,796,245

388,220
1,547,510
10,401,548

394,1311,558,680
10,437,942

394,053
1,489,836
10,325,455

393,557
1,463,988
10,241,351(*1) Adjusted acquisition cost was calculated by adjusting the difference between the acquisition cost and par value using the effective interest rate method.
(*2) Debt securities in Won are recorded at fair value using the yield provided by the Korea Securities Dealers’ Association and debt securities in foreign
currency and off-shore debt securities are recorded at fair value using the bid-price provided by Bloomberg or Reuter or risk-adjusted yield (calculated
by reflecting the issuer’s credit risk to the monetary stabilization bonds’ yield).
(*3) Certain bonds in foreign currencies are subject to swap contracts in order to hedge risks from changes in interest rates and exchange rates. Gain andloss from foreign currency transactions amounting to
2005.

1,053 million and

3,656 million, respectively, have been accounted for as current operation inKOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

The scheduled maturities of available-for-sale and held-to-maturity debt securities as of December 31, 2005 are as follows:(In millions of Won)

Government bonds
Finance debentures
Corporate bonds
Beneficiary certificates
Other securities
Bonds in foreign
currencies

Due in lessThan one year

Due from one
to five years

Due from fiveto ten years

Due after
ten years

1,011,777
1,609,368
222,743296,8192,102

2,391,092
2,129,022
579,048
1,035

29,839209,117
159,134-

3,793
40,374

3,432,708
3,947,507
964,718
296,819
43,511

108,7193,251,528

311,459
5,411,656

680,758
1,078,848

10,04654,213

1,110,982
9,796,245

Total

Debt securities in foreign currencies, classified by country/region, as of December 31, 2005 and 2004 are as follows:

Countries
Korea
USA
Philippines
BrazilHong Kong
OthersIn thousandsof U.S.dollars (*)$$

1,033,216
12,988
5,609
14,5705,144
25,197
1,096,724

2005
In millionsof Won1,046,648
13,157
5,681
14,7595,211
25,526
1,110,982

Ratio (%)
94.21
1.18
0.51
1.33
0.47
2.30
100.00In thousandsof U.S. dollars(*)$$

823,546
27,234
7,675
5,222
5,182
24,655893,5142004
In millionsof Won859,617
28,427
8,011
5,451
5,409
25,734
932,649(*) All currencies other then U.S. dollars were translated into U.S. dollars using the exchange rates as of the balance sheet dates.

48

Ratio (%)
92.14
3.06
0.86
0.59
0.58
2.77
100.00KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

48
49(b) Equity Securities
Equity securities as of December 31, 2005 are as follows:(In millions of Won)
Shares ownedby the Bank
(1,000 shares)
Trading securities:
Trading securities in Won
Available-for-sale securities:
Marketable equity securities in Won (*1)
Marketable equity securities in foreign
currencies
Non-marketable equity securities in Won (*2)
Non-marketable equity in foreign currencies
Other investments

Ownership
ratio (%)

Investment in foreign affiliates:
Korea Exchange Bank of
Canada (“KEBOC”)(*3)
KEB Australia Co., Ltd. (“KEBA”)(*3)
P.T. Korea Exchange Bank
Danamon (“KEBD”)(*3) (*6)
KEB Brazil (“KEBB”)(*3)
Korea Exchange Bank
(Deutsch-land) AG (“KEBDAG”)(*3)
Cairo Far East Bank S.A.E. (“CFEB”)(*3)
KEB NY Financial Corp. (“NYF”)(*3)
KEB LA Financial Corp. (“LAF”)(*3)
KEB USA International Corp. (“USAI”)(*3)

Market or net
asset value

Book
value

4,363

77,57378,96578,96576,495

764,7432,486,215

2,486,215

1,169
28,048151-

15,167
173,995
6,179
1,450

21,158146,365
1,725
1,449

21,158146,365
1,725
1,449

961,534

2,656,912

2,656,912

74,881
15,000850
2,550

78,682
20,6402,550

78,682
20,6402,550

93,281

101,872

101,872

Total available-for-sale securities
Investment in domestic affiliates:
KEB Capital Co., Ltd. (“KEBC”)(*3)
KEB Future Co., Ltd. (“KEBFC”)(*3)
MP&T(*4) (*5)
KEB Investor Services Co., Ltd.(*4)

Acquisitioncost

14,976
3,000
170
510

99.3
100.0
38.1
100.0

334
55,000

100.0
100.0

26,322
38,52758,226
21,49858,226
21,4981
33,72699.0
100.0

27,16817,17559,00911,44159,00911,441

20
832
0.1
0.1
0.1

100.0
31.5
100.0
100.0
100.0

20,5898,281
20,876
20,8762,610

39,5984,243
24,54723,487
3,179

39,5984,243
24,54723,487
3,179

182,424

245,228

245,228

275,705

347,100

347,100

Total securities accounted for using the equity method(*1)

2,466,817 million (book value) of the securities, which are debt-to-equity converted securities, are restricted from being sold.

(*2)

63,825 million (book value) of the securities, which are debt-to-equity converted securities, are restricted from being sold.

(*3) Amounts are based on unaudited financial statements of the affiliates.
(*4) These investment securities were excluded from the calculation to apply equity method because they had assets less thanof prior year and the change in investment arising from these companies was considered insignificant.
(*5) The company is in litigation as of December 31, 2005.
(*6) The Bank acquired shares of P.T. Korea Exchange Bank Danamon at

10,715 million in 2005.

7,000 million as of the end

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

Equity securities as of December 31, 2004 are as follows:(In millions of Won)
Shares ownedby the Bank
(1,000 shares)

Ownership
ratio (%)

4,722

-

48,361

49,71849,718132,865-

1,158,335

1,329,776

1,329,776

1,169

-

30,50443,87043,87050,273-

310,703

169,582

169,582--

12,578
1,505

8,022
1,505

8,022
1,505

1,513,625

1,552,755

1,552,755

Trading securities:
Trading securities in Won
Available-for-sale securities:
Marketable equity securities in Won (*1)
Marketable equity securities in foreign
currencies
Non-marketable equity securities
in Won (*2)
Non-marketable equity in foreign
currencies
Other investments
Total available-for-sale securities
Investment in domestic affiliates:
KEB Capital Co., Ltd. (“KEBC”)(*3)
KEB Commerz Investment TrustManagement Co. Ltd. (“KEBIT”)(*3)(*4)
KEB Future Co., Ltd. (“KEBFC”) (*3)
MP&T(*5)
KEB Investor Services Co., Ltd.(*5)

Investment in foreign affiliates:
Korea Exchange Bank of
Canada (“KEBOC”)(*3)
KEB Australia Co., Ltd. (“KEBA”)(*3)
P.T. Korea Exchange Bank
Danamon (“KEBD”)(*3)
KEB Brazil (“KEBB”)(*3)
Korea Exchange Bank
(Deutsch-land) AG (“KEBDAG”)(*3)
Cairo Far East Bank S.A.E. (“CFEB”)(*3)
KEB NY Financial Corp. (“NYF”)(*3)
KEB LA Financial Corp. (“LAF”)(*3)
KEB USA International Corp. (“USAI”)(*3)

Acquisition
cost

Market or net
asset value

Book
value

14,97699.3

74,881

69,68569,685

2,760
3,000
170
510

46.0
100.0
38.1
100.0

13,80015,000850
2,550

15,60018,394850
2,550

15,60018,394850
2,550

107,081

107,079

107,079334
55,000

100.0
100.0

26,322
38,52750,86820,99750,86820,997

1
33,72685.0
100.0

16,453
17,17544,9509,857

44,950
9,857

20
832
0.1
0.1
0.1

100.0
31.5
100.0
100.0
100.0

20,5898,281
20,876
20,8762,610

44,1694,153
21,97622,0452,841

44,1694,153
21,97622,045
2,841

171,709

221,856

221,856

278,790328,935

328,935

Total securities accounted for using equity method(*1)

1,156,741 million (book value) of the securities, which are debt-to-equity converted securities, are restricted from being sold.

(*2)

66,416 million (book value) of the securities, which are debt-to-equity converted securities, are restricted from being sold.

(*3) Amounts are based on unaudited financial statements of the affiliates(*4) On February 18, 2005, KEBIT was sold. (See note 4(h))(*5) These investment securities were excluded from the calculation to apply equity method because they had assets less thanof prior year and the change in investment arising from these companies was considered insignificant.

50

7,000 million as of the end

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

50
51
As of December 31, 2005, details of investments in affiliates accounted for using the equity method are as follows:(In millions of Won)
Increase (decrease)in equity of equity method investees

KEBC(*1)
KEBIT(*3)
KEBFC(*1)
MP&T(*2) (*4)
KEB Investor
Services Co., Ltd.(*2)
KEBOC(*1)
KEBA(*1)
KEBD(*1) (*5)
KEBB(*1)
KEBDAG(*1)
CFEB(*1)
NYF(*1)
LAF(*1)
USAI(*1)

Acquisition
cost

Beginningbalance underequity method

Acquisition/
Disposition
or dividend

Translation
adjustment

Equity inearnings(losses)(*4)

74,88113,80015,000850

69,686
15,60018,394850(15,600)--

14,666
2,246
(850)

-

(5,670)-78,682
20,640-2,550
26,322
38,527
27,16817,175
20,5898,281
20,876
20,8762,610
289,505

2,550
50,867
20,99744,9509,857
44,1694,153
21,97622,0452,841
328,935

10,715(414)(5,299)193(1,834)(3,572)969(6,941)
(264)
(649)
(650)
(84)
(12,832)

7,166
2,335
10,049
615
2,784
113
3,220
2,092
422
44,858-(3,133)241(8,562)2,550
58,226
21,49859,00911,441
39,5984,243
24,54723,4873,179
347,100

Retainedearnings

Capitaladjustment

Book
value

(*1) Based on the unaudited financial statements of the affiliates.
(*2) These investment securities were excluded from the calculation applying equity method because they had assets less than

7,000 million as of the endof prior year and the change in investment arising from these companies were considered insignificant.
(*3) These were disposed of during February 2005.
(*4) Including

850 million of the impairment losses on equity securities of Meta Payment & Trust Co., Ltd. which were valued at cost.

(*5) The Bank acquired shares of KEB Danamon at

10,715 million in 2005. The Bank recognized

3,133 million of difference between acquisition cost andadditionally acquired equity of investee’s net asset as changes in capital adjustment by using equity method.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

As of December 31, 2004, details of investments in affiliates accounted for using the equity method are as follows:(In millions of Won)
Increase (decrease)in equity of equity method investees
Acquisition
cost

Beginningbalance underequity method

Acquisition/
Disposition
or dividend

Translation
adjustment

Equity inearnings(losses)(*4)

Retainedearnings

Capitaladjustment

210,693
74,88113,80015,000111,505
58,056
14,971
16,478--(111,505)
3,105
1,086
1,916

(457)
-

8,524
-

69,685
15,60018,39482,000850

250,085
850(264,561)--

18,396-384-(4,304)
-

850

2,550
38,493
3,436
26,322
38,527
16,453
17,175
20,5898,281
20,876
20,8762,610
613,4122,550
82,8697,019
47,331
21,47050,5208,041
45,0904,704
721,539(81,575)(6,389)3,543(665)
22,95822,9582,870(300,861)(3,858)(268)(3,027)(2,011)(10,504)(390)(2,384)(605)(2,082)(2,082)(261)(27,472)

2,821
(362)
6,564
1,538
4,934
(1,337)
2,128
1,100
1,169
232
(68,215)

(73)

(257)
54
4,017

2,550
50,86820,99744,9509,857
44,1694,153
21,97622,0452,841
328,935KEBCS(*1)
KEBC
KEBIT
KEBFC
Doosan Heavy
Industries &Construction
Co., Ltd.(*2)
MP&T(*3)
KEB Investor
Services Co., Ltd.(*4)
PUB(*4)KEB Ire.(*5)
KEBOC
KEBA
KEBD
KEBB
KEBDAG
CFEB
NYF
LAF
USAI

Book
value

(*1) Result of operation of KEBCS allocated based on the Bank’s ownership prior to the merger on February 28, 2004 was used in calculations.
(*2) Amounts were excluded from the applying equity method due to the partial disposal of investment.
(*3) These investment securities were excluded from the calculation applying equity method because they had assets less than

7,000 million as of the endof prior year and the change in investment arising from these companies were considered insignificant.
(*4) Amounts were disposed of during 2004.
(*5) The investee was liquidated during 2004.
(*6) Based on the unaudited financial statements of the affiliates as of the end of prior year.

(c) Summary of Financial Information in Affiliates
As of December 31, 2005, summary of financial information in affiliates using the equity method is as follows:(In millions of Won)
KEBOC
AssetsLiabilities
Operating Revenue
Net income

531,976
473,750
28,242
7,166

KEBDAG343,588
303,990
32,925
2,784

KEBD

KEBC

KEBA

243,905
184,300
23,353
10,924

183,037
103,157
41,37920,015

128,224
106,726
14,367
2,335

Others430,496
330,328
54,915
8,204

Total
1,861,226
1,502,251
195,181
51,428(d) Guarantee Deposits for Trust Operations
The Bank is required to annually deposit an amount with bank regulators equal to 0.05% of its capital stock until such deposit equals 10% of its
capital stock as a security deposit to continue its trust operations in accordance with the relevant Trust Act applicable in the Republic of Korea.
The outstanding book value (face value) of debt securities provided as security deposits as of December 31, 2005 and December 31, 2004 are
13,119 million ( 14,045 million) and 17,628 million ( 19,433 million), respectively.

52

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

5253(e) Securities Denominated in Foreign Currencies
Securities denominated in foreign currencies as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005

2004

Currency

In foreign
currency(In Thousands)

Government bonds

USD
HKD
SGD
Others(*1)

20,97334,804
12,905
1,787

21,245
4,547
7,855
1,811
35,45820,005160,039
13,186
14,65820,882
21,482
8,424
15,30066,088Finance debentures

USD
Others(*1)

888,560
30,990900,11231,393
931,505

706,666-

737,617
737,617

Corporate bonds

USD
CHF
JPY
HKD

132,887
1,088,641
300

134,6149,366
39144,019

113,53555
1,022,251300

118,50850
10,34640
128,944

USD
CHF

21,887924

22,172711
22,883

43,764
6,738

45,681
6,211
51,892Others(*1)

242,081245,228
1,379,093

212,546

221,856
1,206,397

Available-for-sale
equity securities

Investments inaffiliates(*2)

Korean Won
equivalent(In Millions)

In foreign
currency(In Thousands)

Korean Won
equivalent(In Millions)(*1) Securities denominated in other foreign currencies are presented at equivalent U.S. dollar amounts.
(*2) Korean Won equivalents were calculated using the book values resulted from applying equity method.

(f) Securities Provided as Collateral
Securities provided as collateral for borrowings from the Bank of Korea and other financial institutions as of December 31, 2005 are as follows:

Guarantees

Pledge value

Bank of Korea

1,509,729

Bank of Korea
Bank of Korea

68,287653,448

Bank of Korea
Korea Development Bank
Futures Corporations, Banks

299,428
34,962409,571

Merrill Lynch
Other financial institutions

4,062
516,969
3,496,456

Reference
Borrowings from the Bank of Korea(BOK)
Overdrafts from BOK
Bonds sold under repurchaseagreements (BOK)Inter-bank settlements
Asset-backed settlements
Futures transaction/Borrowings
denominated in foreign currencies
Credit default swap
Bonds sold under repurchase agreements

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(g) Impairment Losses
Impairment losses on equity securities for the year ended December 31, 2005 are as follows:(In millions of Won)
IssuerMarketable securities
in WonDaerim Corp.
Ssangyong Corp.

Non-marketablesecurities in Won

Daerim Corp. (Preferred stock)Daewoo Electronics Corp
Anam Co., Ltd.
The Korea Economic Daily
VCash Company Co. Ltd.
CHK SPC
Badbank Harmony Ltd.
(Preferred stock)
Korea Smart Card Co.Ltd.

Beginningbalance

KEB 4 SPC

Non-marketable securities
in foreign currencies

CLS Group Holdings

Adjustedbook value

1,337
1,615
2,952
136
32,970
4,400
126
49
2

76
633
709
111
7,503
3,666
6
49
2

1,261
982
2,243
25
25,467
734
120
-

5,479
1,624
44,786

5,479
1,203
18,019421
26,767

1

1

-

5,165
52,904

4,454
23,183711
29,721th

Other

Impairment
loss

Impairment losses on debt securities for the year ended December 31, 2005 are as follows:(In millions of Won)
IssuerAvailable for sales
securities

Daewoo Commercial
Vehicle Co., Ltd.
Hanbosteel Co., Ltd
Kunyoung Co., Ltd.
TCW GEM2th
KEB 11 ABS Subordinated bondth
KEB 12 ABS Subordinated bond

Held to maturity
securities

KEB 6 ABS Subordinated bondth
KEB 8 ABS Subordinated bondth

Beginningbalance

Impairment
loss

Adjustedbook value

388
80
7
30
65,00066,000131,505

257
80
7
30
32,50028,191
61,065131
32,50037,80970,44026,3507,195
33,54526,350835
27,185

6,360
6,360

165,050

88,25076,800

The recovery of impairment losses on debt securities for the year ended December 31, 2005 is as follows:(In millions of Won)
IssuerMarketablesecurities
Non-marketablesecurities

Book value
prior to Adj.

Recovery of
impairment loss

Adjustedbook value

Hynix (*1)

1,426,115

55,833

1,426,115

Aekang

1,426,115

98
55,93198
1,426,213(*1) The amount of recovery of impairment losses reduced the amount of unrealized gain on available-for -sale securities (capital adjustment) and did not
54

impact on the adjusted book value.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

54
55
The recovery of impairment losses on equity securities for the year ended December 31, 2005 is as follows:(In millions of Won)
IssuerAvailable-for-sales
securities

TCW GEM2(*1)
PEI (*2)

Held-to-maturity
securities

KEB 6 ABS Subordinated bondth
KEB 7 ABS Subordinated bondth
KEB 8 ABS Subordinated bondth
KEB 9 ABS Subordinated bondBook value
prior to Adj.

th

Recovery of
impairment loss

Adjustedbook value

3,663
3,663

1,879
917
2,796

-

36,637
31,401
30,25044,907
143,195

18,363
2,393
10,7508,161
39,66755,00033,79441,00053,068
182,862

146,858

42,463

182,862(*1) The recovery of impairment losses is the amount resulted from collecting the principal sum.
(*2) Transferred as accounts receivable as of December 31, 2005.

(h) Sales and Liquidation of Subsidiaries
The Bank had entered into a contract to sell its investments in Pacific Union Bank (“PUB”), a U.S.-based subsidiary, to Hanmi Financial Corp., aholding company of Los Angeles-based Hanmi Bank. This sales transaction was finalized on April 30, 2004 upon the approval from Federal
Reserve Bank of San Francisco on April 12, 2004. The total number of shares of PUB sold was 6,624,052 shares and the sales proceed received
amounted to US$195,924 thousand. The Bank recorded a gain on disposition of available-for-sale securities amounting to 181,463 million in2004 .
KEB Ireland Ltd. (“KEB Ire”), a subsidiary of the Bank, was liquidated on September 30, 2004.
On February 18, 2005, the Bank sold 2,760,000 shares of KEB Commerz Investment Trust Management Co., Ltd., a domestic subsidiary of theBank, to Landmark Investment Trust Management Co., Ltd. for 28,043 million. The Bank recorded a gain on disposition of available-for-salesecurities amounting of 11,275 million for the year ended December 31, 2005 .

(i) Sale of Investments Accounted for Using the Equity Method
On December 17, 2004, the Bank sold four million shares (out of 16.4 million shares) of Doosan Heavy Industries & Construction Co., Ltd. at
49,566 million. As its ownership declined to 11.9%, the remaining 12.4 million shares with book value of 198,173 million were excluded fromthe application of equity method and reclassified into available-for-sale securities. The Bank recorded a gain on disposition of available-for-salesecurities of 593 million which was classified as non-operating income in 2004.
The Bank sold 12.4 million shares of the aforementioned company for 215,085 million in 2005. For year ended December 31, 2005, the Bank
recorded a gain on disposition of available-for-sale securities amounting to 63,275 million which is classified as non-operating income.

(j) Elimination of unrealized profit from inter-company transactions
Material unrealized profit from inter-company transactions is eliminated when equity investments were valued. As of December 31, 2005,
unrealized gain from lease transaction of inter-company transaction amounted to 977 million. There is no unrealized gain for the year ended
December 31, 2004.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(k) Private Placement Funds
Assets for private placement funds held by the Bank as of December 31, 2005 are as follows:(In millions of Won)
Forever 12M
Private Bond 2
Due from banks in Won
Call loans
Available-for-sale securities
OthersSAFE&PLUS
Private Hybrid 5

1,025
20,327
199,661
26,819247,832

Total

243
1,119
28,077239
29,678

1,268
21,446
227,738
27,058277,510(l) Structured Securities
Among available-for-sale securities, structured securities as of December 31, 2005 are as follows:

Securities in foreign currency
Related to credit risk
securities

Type

IssuerFace value

Date of issue

Maturity

Fair value

Related risk

CLN

LehmanTreasury

US$ 10,000 (*1)

2003.03.06

2006.03.06

10,173Credit risk(*1) In thousands of U.S. dollars

In addition to the above structured securities, the Bank has two private convertible debentures with par value of 1,970 million and the bookvalue of nil, classified as loans. The Bank also has three convertible bonds in foreign currencies with par value of 8,733 million (US$8,621
thousand) and the book value of nil classified as available-for-sale securities.

(5) Loans(a) Loans as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Loans in Won
Loans in foreign currencies
Bills bought in Won
Bills bought in foreign currencies
Call loans
Credit card accounts
Securities purchased under resale agreements
Other
Less: allowance for loan losses
net deferred loan fees and costs

28,369,355
4,819,927
776,340
3,161,231
1,329,649
2,260,487
774,608
41,491,597(566,995)(2,667)40,921,935

2004
25,678,795
5,172,849
895,815
3,126,906
825,5732,619,986
1,230,000
627,116
40,177,040(871,228)(1,271)39,304,541

Interest rates on the above loans are normally prime rates or effective market rates plus certain spreads, as determined based on the types andterms of loans. Most loans bear either floating interest rates or fixed rates which are subject to subsequent changes as prime rates fluctuate.

56

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

56
57(b) Loans to Other Financial Institutions
Loans to other financial institutions as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Banks
Loans in Won
Loans in foreign
currencies
Call loans

Domestic

Foreign

Total

2004
Domestic
Foreign

Banks

Total

36,433492,211-528,644-

182,170-

182,170

891,911928,344

89,339581,550

437,738
437,738

89,3391,329,649
1,947,632

175,029
175,02980,081
262,251

650,544
650,544

80,081
825,573
1,087,824(c) Foreign Currency Loans by Country
As of December 31, 2005 and 2004, the Bank’s loans denominated in foreign currencies classified by nationality of borrowers are as follows:

Countries
Korea
Japan
Indonesia
China
Thailand
OthersThousands of
U.S. dollars(*)$$

3,382,112
272,770
50,42352,092
19,823980,852
4,758,072

2005
Millionsof Won3,426,079
276,316
51,07852,76920,081
993,604
4,819,927

Thousands of
U.S. dollars(*)

Ratio (%)
71.08
5.73
1.06
1.10
0.42
20.61
100.00$$4,026,664
225,52154,45940,3959,940
598,8074,955,786

2004
Millionsof WonRatio (%)

4,203,032
235,399
56,844
42,164
10,375625,035
5,172,849

81.25
4.55
1.10
0.82
0.20
12.08
100.00(*) Loans denominated in other foreign currencies were presented at equivalent U.S. dollar amounts using the exchange rates as of the balance sheet date.

(d) Loans by Industry
As of December 31, 2005 and 2004, the Bank’s loans denominated in Korean Won, including trade bills discounted, corporate bills discounted (aportion of bills discounted) and foreign currency loans to domestic borrowers classified by industry, are as follows:

2005
AmountManufacturing
Financial and insurance
Telecommunications
Wholesale and retail/service
Construction
Individuals and households
OthersLoans of overseas branches

9,302,029
468,380
31,8593,775,815
1,857,698
13,488,471
3,401,106
32,325,358
1,566,827
33,892,185

Ratio (%)
28.78
1.45
0.10
11.68
5.74
41.73
10.52
100.00

Amount(In millions of Won)
2004
Ratio (%)

9,139,626
271,325
47,6793,692,559
1,597,761
12,153,088
3,095,026
29,997,064
1,674,366
31,671,430

30.47
0.90
0.16
12.31
5.33
40.50
10.33
100.00KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(e) Loan Classification
The asset quality classification for loans and allowance for loan losses as of December 31, 2005 and 2004 are as follows:(In millions of Won)2005 (*1)
NormalLoan:
Loans in Won(*2)
Loans in foreign
currencies
Bills bought in foreign
currencies(*3)
Advances
payments acceptanceand guarantees
Call loans
Credit card loans
and receivables
Privately placed bonds
Interbank loans
in foreign currencies
Others(*4)

Precautionary

Substandard

Estimatedloss

Doubtful

Allowance forloan losses

Total

28,494,269

282,530

164,816

28,32452,58729,022,526

388,9144,737,186

57,247

16,009

3,367

5,408

4,819,217

53,9383,229,865

3,894

-

909

-

3,234,668

17,505574
1,329,649

8,830
-

7,645
-

-

961
-

18,0101,329,649

2,669-

2,105,584
371,384

91,065--56,691-7,147-

2,260,487
371,384

98,863
1,857

385,205
40,653,716
477,874
41,131,590

443,566
12,906456,472

188,470
34,994
223,464

89,291
1,797
91,088

66,103
5,169
71,272385,205
41,441,146
532,740
41,973,886

563,746
3,249
566,995(*1) These balances represent loan amounts after deduction of present value discounts.
(*2) Including corporate bills discounted and trade bills discounted.
(*3) Including local letter of credit bills brought and exporting bills bought.
(*4) Suspense receivables, and others(In millions of Won)
2004 (*1)
NormalLoans :
Loans in Won(*2)
Loans in foreign
currencies
Bills bought in foreign
currencies(*3)
Advances
payments acceptanceand guarantees
Call loans(*4)
Credit card loans
and receivables
Privately placed bonds
Interbank loans
in foreign currencies
Securities purchased
under resaleagreements
Others(*5)

Precautionary

Substandard

Estimatedloss

Doubtful

Allowance forloan losses

25,589,540

349,508

279,665

37,84980,177

26,336,739

389,019

5,007,950

96,93151,801

10,1495,077

5,171,908

95,836

3,195,440

22

7,468

-

5

3,202,935

17,4763,426
794,107

9,400-

21,033-

13,394-

4,763-

52,016794,10728,228-2,374,100
221,946

224,555
-

85
5,637

162,248
1,067

13,44138

2,774,429
228,688244,989
2,809

294,156

-

-

-

-

294,156-

1,230,000
38,710,665
664,901
39,375,566

680,416
3,410
683,826

365,689
43,330409,019

224,707
1,793
226,500

103,501
7,888
111,389

1,230,000
40,084,978
721,32240,806,300

778,357
92,871
871,228(*1) These balances represent loan amounts after deduction of present value discounts.
(*2) Including corporate bills discounted and trade bills discounted.
(*3) Including local letter of credit bills brought and exporting bills bought.
(*4) Excluding inter-bank reconciliation funds.
(*5) Comprising due from banks, suspense receivables, non-performing asset management fund and others.
58

Total

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

58
59(f) Allowance for Loan Losses
Changes in allowance for loan losses for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005

2004

Balance at the beginning of the year
Provision for loan losses
Loans charged off
Transfer from merger with KEBCSTransfer from repurchase of loans,from KAMCO and others
Translation adjustments and others
Change of present value discount871,228
41,955(578,655)-

987,080
840,235(2,779,106)
1,478,366

250,417(5,734)(12,216)

380,336(21,857)(13,826)

Balance at the end of the year

566,995

871,228

Ratios of allowance for loan losses to total loans (net of present value discount) as of December 31, 2005, 2004 and 2003 are 1.41%, 2.26% and2.56%, respectively.
As of December 31, 2005 and December 31, 2004, the Bank’s loans, of which the balance had been already charged off without the expiry of theBank’s legal claim rights against borrowers or guarantors, amounted to 2,063,689 million and 5,094,847 million, respectively.

(g) Restructured Loans
The Bank recognized losses on troubled loans restructured under workout plans or other similar rescheduling agreements if the total discounted
future cash receipts specified by the modified terms of rescheduled loans are less than the nominal amount of those loans. The present value of
total future cash receipts under the restructuring plans which have been decided by December 31, 2005, discounted using interest rates of 5.25%
to 15.25%, is 813,814 million which is less than their nominal value of 870,057 million.
The changes in present value discount and net deferred loan fees and costs of the Bank’s loans for the year ended December 31, 2005 are as
follows:
Balance atJanuary 1, 2005
Allowance for loan losses(Present value discount)
Net deferred loan fees and costs

Increase

68,460
1,271

2,335

Decrease(In millions of Won)
Balance at
December 31,2005

12,216939

56,244
2,667(h) The scheduled repayments of loans as of December 31, 2005 are as follows:(In millions of Won)
Loans in Won (*)
Due in less than one year
Due from one to two years
Due from two to three years
Due from three to five years
Due after five years

23,137,137
1,320,252
1,461,597
1,149,846
2,003,426
29,072,258

Loans inforeign currencies
3,369,690
351,038
396,562
373,277
329,360
4,819,927

Total
26,506,827
1,671,290
1,858,159
1,523,123
2,332,786
33,892,185(*) Including trade bills discounted and corporate bills discounted.

(i) Loans to Employees
The Bank provides housing loans bearing interest at a rate of 6.00% per annum to employees. The outstanding balance of these housing loan
receivables as of December 31, 2005 and December 31, 2004 amounts to 45,755 million and 47,782 million, respectively.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(6) Fixed Assets
Fixed assets as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Tangible assets:
Land
Buildings
Office facilities held on lease
Equipment
Construction in-progress
Less: accumulated depreciation
Intangible assets:
Development costs, net (primarily software)
Others
Foreclosed assets:
Acquisition cost

2004
382,871486,787
74,419573,2111,517,288
663,079854,209387,579
459,515
61,384
562,516351
1,471,345
617,575
853,770

82,135
1,925
84,06039,933
2,923
42,85673
938,34270
896,696

As of December 31, 2005, the domestic branches of the Bank are under renovation for repairs and working condition improvement, and inconnection with the renovations, the Bank incurred 32,411 million for the year ended December 31, 2005.
As of December 31, 2005, the residual value of fixed assets, which had been fully depreciated and used, amounted to

128 million.

As of December 31, 2005, the value of the Bank’s domestic land as determined by the tax authorities for property tax assessment purposes
amounted to 592,298 million (book value 382,871million). The officially declared value, which is used for government purpose, is not intended
to represent fair value.
As of December 31, 2005, a substantial portion of the Bank’s buildings, equipment and foreclosed assets are insured against fire and othercasualty losses with a coverage amounting to 450,656 million. The Bank maintains insurance coverage for cars and vehicles against accident
loses and liabilities. Office facilities held on lease are also insured for theft and casualty losses.

60

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

60
61(7) Other Assets
Other assets as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Guarantee deposits
Account receivable
Accrued income
Prepaid expenses
Deferred tax assets (note 26)
Derivatives instrument assets (note 20)
Suspense receivable
Security deposits
Domestic exchange settlement
Loans to trust accounts
Others2004
482,0713,558,573
333,627
65,864559
496,666
52,442
16,4691,164,929
42,675
6,213,875

498,7212,744,995
270,500
97,575
204,450
738,364
98,451
21,514459,871
1,901
49,552
5,185,894(8) Merchant Banking Account Assets(a) Merchant banking account assets as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Loans
Cash management account (CMA)
Financing lease receivable
Operating lease assets
Other assets
Less: allowance for loan and lease losses
accumulated depreciation of operating lease asset
allowance for estimated loss of future
sale of operating lease assets

2004
905,680
214,740
2,278
11
1,122,709(5,805)-871,560
235,425
34,48926,145
14,883
1,182,502(7,778)(17,175)

1,116,904(45)
1,157,504(b) Loans
The merchant banking division of the Bank provides discounting of short-term notes maturing in one year or less at the interest rate of
3.78~5.95% per annum.
Loans of the merchant banking division held as of December 31, 2005 and 2004 comprise the following:(In millions of Won)
2005
Notes discounted
Factored accounts receivable2004
872,788
32,892905,680

863,623
7,937
871,560

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(c) Cash Management Accounts
Cash management accounts (“CMA”) comprise customers’ deposits maturing in 180 days or less which are invested in securities approximating
the value of such deposits. The income from the investments, less management fees, is distributed to the accounts on the contract maturity date.
If the deposit is withdrawn before maturity, distribution is based on a rate computed daily. CMA assets are comprised of notes discounted
amounting to 214,740 million and 235,425 million as of December 31, 2005 and 2004, respectively.

(d) Financing Lease Receivables
The estimated future lease payments in aggregate to be received on financing leases as of December 31, 2005 are as follows:(In millions of Won)
Amout
January 1, 2006 ~ December 31, 2006
January 1, 2007 ~ December 31, 2007
After January 1, 2008

1,617
661
-

Total lease payments to be received
Less: Unearned interest income

2,278
(128)
2,150

As of December 31, 2005, financing lease receivables amounting to US$929 thousand are denominated in foreign currencies, and financing leasereceivables amounting to 1,337 million are denominated in Korean Won.

62

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

6263(e) Asset quality Classification and Related Allowance for Loan and Lease Losses
The asset quality classification and allowance for loan and lease losses of the accounts in the merchant banking division of the Bank as ofDecember 31, 2005 and 2004 are as follows:(In millions of Won)
Allowance forloan andlease losses

Classification
Normal2005:
Loans(*1)
Financing leasereceivables(*2)
2004:
Loans(*1)
Financing leasereceivables(*2)

Precautionary Substandard

Doubtful

Loss

Total

1,120,420

-

-

-

-

1,120,420

5,602

1,194
1,121,614

-

941
941

15
15

-

2,150
1,122,570

203
5,805

1,103,215

3,770

-

-

-

1,106,985

7,418

33,2691,136,484

3,770

970
970

-

-

34,2391,141,224

360
7,778

(*1) Including notes discounted in CMA account.
(*2) These balances represent loan amount after deduction of present value discounted.

(f) Other Assets
As of December 31, 2005 and 2004, other assets included in the merchant banking assets comprise the following:(In millions of Won)
2005
Deferred gain on foreign currency translation
Accrued interest income

2004
11
11

13,261
1,622
14,883

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(9) Deposits(a) Deposits as of December 31, 2005 and 2004 are as follows:(In millions of Won)
Interest rate (% ) at 2005.12.31

2005

2004

Deposits in Won:
Demand deposits
Savings and time deposits
Mutual installment saving

0~0.200~6.502.50~3.90

14,355,708
12,850,662
287,600
27,493,970

12,505,326
14,981,796
496,128
27,983,250

Deposits in foreign currencies:
Demand deposits
Savings and time deposits

0~1.33
3.42~4.54

Certificates of deposits

2.40~3.20

3,221,360
4,306,932
7,528,292
2,987,246
38,009,508

2,751,788
4,339,413
7,091,201
3,327,713
38,402,164(b) Deposits from other financial institutions as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Banks
Deposits in Won:
Demand deposits
Savings andtime deposits
Certificates of deposits
Deposits in foreign Currencies:
Demand deposits
Savings and time
deposits

Total

Banks

2004
Domestic
Foreign

Domestic

Foreign

Total

38,593538,386

1,290

578,269

21,386298,289

1,159

320,834

20,000-1,250,244
1,654,087

28,754-

1,298,998
1,654,087

25,995-

1,724,070
2,137,416

25,711-

1,775,776
2,137,416

270,391

90,59994,859455,849

74,763

26,193

66,229167,185

328,984

197,1223,730,438

124,903

197,122
4,184,325

122,144917,039
5,103,007

93,099917,039
5,318,250(c) The scheduled maturities of deposits as of December 31, 2005 are as follows:(In millions of Won)
Depositin wonDue less than one year
Due from one to two years
Due from two to three years
Due from three to five years
Due after five years

64

24,699,294
1,274,406
569,050
507,546
443,674
27,493,970

Deposit inforeign currencies
7,503,366
20,094
4,653
179
7,528,292

Certificatesof deposits
2,987,246
2,987,246

Total
35,189,906
1,294,500
573,703507,725
443,674
38,009,508

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 20046465(10) Borrowings(a) Borrowings as of December 31, 2005 and 2004 are as follows:(In millions of Won)
Interest rate (% ) at 2005.12.31
Borrowings in Won:
Borrowings from the Bank of Korea
Borrowings from Governmental
and Public funds
Borrowings from other banks
Borrowings from others
Borrowings in foreign currencies:
Short-term borrowings
Medium and long-term borrowings
Refinance
Borrowings from banks
for subordinated loans
OthersDue to Bank of Korea in foreign currencies
Securities sold under repurchase agreements
Bills soldCall money

2005

2004

2.00

1,194,989

1,062,945

1.50~4.25
1.50~4.55
2.00~4.90

249,332
222,466
508,652
2,175,439

297,889
116,971
501,574
1,979,379

3.95~5.03
3ML+40BP~6ML+60BP
3.91~4.62

2,236,265
175,274
293,770

1,803,103
374,611
156,570

2.35~2.55
0~4.27

4,804
743,765
3,453,878
5,257
734,763
272,289
98,7766,740,402

8,762
665,089
3,008,135
135,721732,110130,255
247,838
6,233,438

0.10~6ML+50BP
2.30~5.00
2.50~4.00
2.55~4.31(b) Subordinated borrowings at December 31, 2005 and 2004 are as follows:(In millions of Won,Thousands of U.S. Dollars)
LenderBorrowings inforeign currencies

Commerzbank

Annualinterest rate (%)

2005

2004
-

-

36,533(US$35,000)(c) As of December 31, 2005, in the normal course of funding activities, the Bank provided securities as collateral forborrowings from the Bank of Korea and other financial institutions (see note 4).
(d) The scheduled maturities of borrowings as of December 31, 2005 are as follows:(In millions of Won)
Borrowings
in won in
Due less than one year
Due from one to two years
Due from two to three years
Due from three to five years
Due after five years

1,220,500
50,927
85,346
209,641
609,025
2,175,439

Borrowings
foreign currencies
3,445,873
3,894
4,111
3,453,878

Due to Bank of Korea
in foreign currencies
5,257
5,257

Total
4,671,630
54,82189,457
209,641
609,025
5,634,574

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(11) Debentures(a) Debentures as of December 31, 2005 and 2004 are as follows:(In millions of Won)
Interest rate (% ) at 2005.12.31
Debentures in Won:
Debentures
Subordinated debentures
Hybrid Tier 1

2005

3.50~7.73
4.90~8.00
8.50

3,700,000
1,293,130
250,000
5,243,130(8,109)5,235,021

4,384,000
1,442,504
250,000
6,076,504(13,052)
6,063,452

6ML+10BP~14BP
3ML+2.00~5.00

700,033(4,350)695,683
5,930,704

419,757(2,428)417,3296,480,781

Discounts on debentures
Debentures in foreign currencies:
Debentures
Discounts on debentures

2004(b) Subordinated debentures as of December 31, 2005 and 2004 are as follows:(In millions of Won,Thousands of U.S. Dollars)
Maturity
Sold to general public
JPMorgan Chaseand Merrill Lynch(*1)
Citigroupand HSBC(*1)(*2)
Credit Suisse (*1)(*3)

Interest rate (%)
at 2005.12.31

2005

2004

Feb. 28, 2005
~ Nov. 28, 2014
Nov. 18, 2006

4.90~8.00

1,293,130

1,442,504

3ML+2.00

June 10, 2015

5.00

208,760(US$200,000)-

June 30, 2010-

202,600(US$200,000)
294,833(US$291,050)-

210,997(US$202,143)
1,862,261

1,790,563(*1) The first underwriters.
(*2) After June 10, 2010, the optional early redemption right can be exercised.
(*3) On June 30, 2005, this was repaid due to exercising the Bank’s optional early redemption right.

Certain subordinated debentures are under swap contracts in order to hedge risks from changes in interest rates and exchange rates. Gain andloss on foreign currency transactions amounting to 9,067 million and 2,220 million, respectively, have been accounted for in connection tosuch contracts for the year ended December 31, 2005.

(c) As of December 31, 2005, Hybrid Tier 1 bond are as follows:(In millions of Won)Type
Hybrid Tier 1(*1)

Maturity (*2)

Interest rate (*3)

May 28, 2033

8.50%

Amount(*1) After 5 years from issuing date, call option can be exercised under the authorization of Governor of Financial Supervisory Service.
(*2) After expiration, the bond can be extended under the same terms.
(*3) Beginning May 29, 2013, the interest rate increases to 10.0%

66

250,000

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

66
67(d) The scheduled maturities of debentures as of December 31, 2005 are as follows:(In millions of Won)
Debentures in Won
Due in less than one year
Due from one to two years
Due from two to three years
Due from three to five years
Due after five years

Debenturesin foreign currencies

1,510,626
2,740,000
492,504
500,000
5,243,130

Total

332,264
24,312
48,624
294,833
700,033

1,842,890
2,764,312
541,128
794,833
5,943,163(12) Other Liabilities
Other liabilities as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Accrual for retirement andseverance benefits (note 14)
Allowance for acceptances and guarantees
Due to trust accountForeign exchange remittance pending
Account payable
Accrued expenses
Unearned income
Deferred tax liabilities (note 26)
Deposits for letter of guarantees and others
Derivative instrument liabilities (note 20)
Suspense receipt accrual
Liability for GIRO accounts
Agency receipt liability
Others2004
45,14340,593523,900
247,550
3,608,765
617,887
49,534
34,697
144,566
652,644
63,037
103,630
660,597730,069
7,522,612

34,06918,982402,909
253,4482,701,081
743,694
46,390139,134
831,130
155,025
81,960564,844
215,060
6,187,726(13) Merchant Banking Account Liabilities(a) Borrowings as of December 31, 2005 and 2004 are as follows:(In millions of Won)
Interest rate (% ) at 2005.12.31
Notes payable
CMA deposits

2005

2.85~3.87
2.80~3.50

2004
806,786
278,867
1,085,653

792,667
262,687
1,055,354

Notes payable mature within a maximum of one year from issue date and bear interest at variable rates according to market conditions and noteterms.

(b) Other liabilities as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Foreign exchange remittance pending
Accrued expenses
Unearned income

2004
711
3,717
4,428

8,804
806
3,124
12,734

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(14) Retirement and Severance Benefits
Retirement and severance benefits as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Balance at the beginning of the year
Provisions for retirement and severance benefits
Transfer from KEBCS
Severance payments
Adjustments of foreign exchange transactions

2004
123,258
60,375(7,247)(250)
176,136(130,157)(836)
45,143

Deposits of insurance for retirement and severance benefits
Transfer to the National Pension Fund
Balance at the end of the year

85,73954,233
23,611(40,071)(254)
123,258(88,341)(848)
34,069(15) Assets and Liabilities Denominated in Foreign Currencies
Assets and liabilities denominated in foreign currencies as of December 31, 2005 and 2004 are as follows:
2005
In thousands of
U.S. dollars
Assets:Cash and due from banks
Securities
Loans and lease assets$$
Liabilities:
Deposits
Borrowings
Debentures
Others$$2004
In millions ofWon

In thousands of
U.S. dollars

1,058,415
1,361,396
9,709,079
12,128,890

1,072,175
1,379,093
9,835,298
12,286,566$

7,431,680
3,675,332
691,049244,373
12,042,434

7,528,292
3,723,111
700,033
247,550
12,198,986

$

$

$

In millions ofWon

939,825
1,155,774
9,130,052
11,225,651

980,989
1,206,397
9,529,947
11,717,333

6,793,640
3,421,053
402,143
242,813
10,859,649

7,091,201
3,570,895
419,757
253,448
11,335,301

Assets and liabilities of the Bank denominated in other than U.S. Dollars were converted into equivalent U.S. Dollar amounts using the exchange
rate prevailing on December 31, 2005 and December 31, 2004.

(16) Asset Revaluation
In accordance with the Asset Revaluation Law, the Bank elected to revalue land, buildings and investment securities on January 1, 1993. The
revaluation gain of 370,730 million represents the difference between the revalued amount and the net book value of the revalued assets at
January 1, 1993, of which 359,608 million, net of 3% revaluation taxes, was used for disposition of accumulated deficit.

(17) Other Statuary Reverses and Accumulated Deficit(a) Other Statuary Reserves
Relevant Japanese regulations require the Bank’s overseas branches located in Japan to appropriate a minimum of 10% of annual income after
income taxes as a Japanese legal reserve, until such reserve equals Y2,000 million. This reserve is not available for the payment of cash dividends
and may be utilized upon liquidation of the Japanese branches. In addition, Singapore and Hanoi branches’ statuary reserves are included in thisreserve amount.

68

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

6869(b) Adjustments to the Beginning Accumulated Deficit
Details of adjustments to the beginning accumulated deficits as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
The beginning accumulated deficit before adjustments
Adjustments:
Equity method accounting for investment securities
in subsidiaries
The beginning accumulated deficit after adjustments

2004(642,268)(344,482)

321(641,947)(73)(344,555)(18) Capital Adjustments
Capital adjustments as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2004
Discounts on stock issued
Unrealized gain on
available-for-sale securities
Unrealized loss onheld-to-maturity securities
Unrealized gain on
Investments in affiliates
Unrealized loss on
Investments in affiliates
Stock options

Increase

Deferred tax
adjustment

Decrease

2005(324,854)---(324,854)

594,908

1,535,292(190,456)(533,430)

1,406,314-(1,037)

111

255

(671)

32,101

88(10,269)(6,028)15,892(1,456)
7,649
308,348

8,531
1,542,874

284(1,221)(201,551)

322(538,881)(850)
14,9591,110,790(19) Stock Options
As of December 31, 2005, stock options granted to the Bank’s employees and executives are as follows:(In millions of Won)

Grant date
March 25, 2000
March 28, 2000(*)
May 18, 2000
September 14, 2000(*)
March 13, 2001
March 30, 2002(*)
August 26, 2002
March 31, 2003(*)
September 4, 2003(*)
September 16, 2003
February 13, 2004
March 7, 2005
June 29, 2005

Stock
options
granted
784,000
53,369400,000
74,716562,000
32,020725,000
101,401
53,369120,000
2,450,000
1,435,000
200,000
6,990,875

Stock options
expiredto dateStockoptions
exercisedStock
options
outstanding

Exercise pricein Wonper share

761,500
377,500
15,00024,015421,850
54,400380,000
80,0002,114,265

22,50010,000121,000
42,990196,490

53,36912,50074,716
426,000
8,005
260,160
101,401
53,36965,6002,070,000
1,355,000
200,000
4,680,120

10,00015,927
10,00015,9275,000
70,7156,300
13,266
15,533
5,000
7,000
8,800
9,000

Exerciseperiod2003.03.26~2006.03.25
2003.06.22~2006.03.28
2003.05.19~2006.05.18
2003.09.15~2006.09.14
2004.03.14~2007.03.13
2005.03.31~2008.03.30
2005.08.27~2008.08.26
2006.04.01~2009.03.31
2006.09.05~2009.09.04
2006.09.17~2009.09.16
2006.02.14~2009.02.13
2007.03.08~2010.03.07
2007.06.30~2010.06.29(*) Granted from KEBCS prior to the merger with the Bank. Exercise price per share and the shares outstanding were adjusted from based on the merger
ratio.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

In accordance with the agreement of the board of directors of the Bank, stock options were granted to the executives and the employees of theBank. All stock options granted prior to December 31, 2003 were accounted for using minimum value method using the Black-Scholes model.
Effective on January 1, 2004, the Bank is required to use fair value method using the Black-Scholes model for all new stock options granted after
December 31, 2003 in accordance with Korea Accounting Institute Interpretation 39-35. However, old options granted prior to December 31, 2003
are still allowed to be accounted for using minimum value method using the Black-Scholes model.
Primary assumptions utilized to determine compensation costs under fair value basis method are as follows:

Grant date
March 25, 2000
March 28, 2000(*)
May 18, 2000
September 14, 2000(*)
March 13, 2001
March 30, 2002(*)
August 26, 2002
March 31, 2003(*)
September 4, 2003(*)
September 16, 2003
February 13, 2004
March 7, 2005
June 29, 2005

Risk-freeinterest rate (%)

Expected exercise
period (year)

Volatilityof the underlying
stock price (%)

Expected
dividend rate (%)

6.35
6.70
6.35
6.70
6.35
6.39
6.35
4.62
4.40
4.54
5.12
4.43
3.89

6
3.25
6
3
6
3
6
3
3
6
5
5
5

90.01
49.68
90.01
61.29
90.01
63.53
90.01
58.35
50.30
89.81
84.86
76.70
71.85

0.0
0.0
0.0
0.0
0.0
4.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0

(*) Granted from KEBCS prior to the merger with the Bank. Exercise price per share and the shares outstanding were adjusted based on the merger ratio.

Changes in stock options during the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005

Balance at the beginning of the year
Compensation costs
Transfer from merger with KEBCS
Decrease due to stock options exercised
Balance at the end of the year

2004
7,649
8,531
(1,221)
14,959

14
6,492
1,143
7,649

The difference between compensation costs calculated using minimum value method and those calculated using fair value method for the year
ended December 31, 2005 is as follows:(In millions of Won)
Minimum value
methodTotal compensation costs
Compensation costs for the year
ended December 31, 2005
Accumulated compensation costs
as of December 31, 2004
Compensation costs to be recognized

Fair value
method23,14524,856

8,531

8,725

7,579
7,035

9,071
7,060

If the Bank applies fair value method in calculating compensation costs, ordinary income, net earnings, ordinary earnings per share and net
earning per share for the year ended December 31, 2005 are as follows:(In millions of Won)
As reported
Ordinary income
Net income
Ordinary earnings per share
Net earning per share

70

1,912,637
1,929,327
2,966
2,992

Adjustment

Revised
(194)
(194)
(1)
(1)

1,912,443
1,929,133
2,965
2,991

140,000 shares of stock option were canceled due to the retirement before agreed service period. The number of exercised stock options were
196,000 shares and the difference between market value and exercise price that the Bank paid is 1,221 million.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 20047071(20) Commitments and Contingencies(a) Guarantees and Acceptances
The Bank makes various commitments whereby it accepts customer contingencies or guarantees customer’s liabilities in the course of normal
business to extend credit to customers. The confirmed Guarantees and acceptances outstanding as of December 31, 2005 and 2004 aresummarized as follows:(In millions of Won)
2005
Guarantees and acceptances in Won
Guarantees and acceptances in foreign currencies

2004
747,3171,750,625
2,497,942

798,429
1,764,396
2,562,825

The unconfirmed guarantees and acceptances and endorsed notes with collateral outstanding as of December 31, 2005 and 2004 aresummarized as follows:(In millions of Won)
2005
Letters of credit issued but not yet drawn
Other guarantees and acceptance2004
3,147,784
11,926
3,159,710
52,672
3,212,382

Endorsed notes with collateral

3,686,975
14,8403,701,815
94,493
3,796,308

The Asset quality classification of the guarantees and acceptances and allowance for acceptances and guarantees as of December 31, 2005 and2004 are as follows:(In millions of Won)
Allowance for
Guarantees andAcceptance2005
NormalConfirmed guarantees
and acceptance
Unconfirmed guarantees
and acceptance(*1)
Endorsed notes
with collateral(*1)

Precautionary Substandard

Doubtful

Loss

Total

2,447,099

12,671

37,958204

102,497,942

33,0683,072,430

86,823446

11-3,159,710

7,262

52,672
5,572,201

99,49438,404215

1052,6725,710,324

263
40,593(*1) The unconfirmed Guaranteed and acceptances and endorsed notes with collateral are required to accrue allowance for estimated potential losses from2005.

(In millions of Won)
2005
NormalConfirmed guarantees
and acceptance

2,498,425

Precautionary Substandard
34,94327,032

Doubtful
1,160

Loss
1,265

Total
2,562,825

Allowance for
Guarantees andAcceptance
18,982

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

The confirmed guarantees and acceptances, excluding guarantees and acceptances in offshore branches, classified by industry as of December
31, 2005 and 2004 are as follows:
2005
AmountManufacturing
Wholesale and retail / service
Construction
Financial and insurance
Telecommunications
OthersRatio (%)

1,166,898
433,141
344,414205,111
11,329218,5032,379,396
118,5462,497,942

Acceptance in overseas branches

Amount

49.04
18.20
14.47
8.62
0.48
9.19
100.00(In millions of Won)
2004
Ratio (%)

1,192,874
395,435
350,427
207,800
10,181
268,394
2,425,111
137,7142,562,825

49.19
16.31
14.45
8.57
0.42
11.06
100.00The confirmed guarantees and acceptances denominated in foreign currency classified by country as of December 31, 2005 and 2004 are as
follows:(In millions of Won)

Countries
Korea
FranceGermany
U.K.
U.S.A.
Japan
OthersThousands of
U.S. dollars(*)$$

1,479,684
47,65537,514
9,620
33,11025,232
95,344
1,728,159

2005
Millionsof WonRatio (%)

1,498,920
48,27538,002
9,745
33,54025,56096,583
1,750,625

85.62
2.76
2.17
0.56
1.92
1.46
5.51
100.00Thousands of
U.S. dollars(*)
$

$

2004
Millionsof Won1,489,732
59,34522,443
7,505
27,121
29,53754,675
1,690,358

Ratio (%)

1,554,982
61,944
23,426
7,834
28,30930,831
57,0701,764,396

88.13
3.51
1.33
0.44
1.60
1.75
3.24
100.00(*) Guarantees and acceptances dominated in other foreign currencies were presented at equivalent U.S. dollar amounts using the exchange rates as of thebalance sheet dates.

The Bank’s loan commitments as of December 31, 2005 and 2004 are as follows :(In millions of Won)
2005
Commitments for loans in Won
Commitments for foreign currency loans
Securities purchase commitments in Won
Other commitments in foreign currencies

72

31,162,039
2,045,095
409,033
8,993,490
42,609,657

2004
605,206
21,09950,00074,632
750,937

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

72
73
The Bank accrued allowance for estimated potential losses on commitments considering the credit conversion factor based on the new standard
of Bank for International Settlements Accord by applying the same methodology that was used to determine the allowance for loan losses. As of
December 31,2005 the bank recognized 90,781 million of provision for abovementioned commitments. (note 2.(c))
As of December 31, 2005 and 2004, the Bank’s loans, of which the balance had been already charged off without the expiry of the Bank’s legal
claim rights against borrowers or guarantors, amounted to 2,063,689 million and 5,094,847 million, respectively.
Government bonds sold through its branches as of December 31, 2005 and 2004 amounted to

13,878 million and

24,484 million, respectively.

Endorsed notes with collateral amount to 52,672 million and 94,493 million as of December 31, 2005 and 2004, respectively. Endorsed notes
without collateral held at the merchant banking account amount to 2,073,972 million and 1,479,383 million as of December 31, 2005 and2004, respectively.
The Bank purchased the note forged by the employee of the Kukdong City Gas Co. Ltd and transferred it by endorsement without collateral
recognizing as suspense receivables in other assets amounting to 32,601 million as of December 31, 2005. The Bank is in litigation for theforged note and recognized 32,601 million of other liability related to these lawsuits.

(b) Derivative Financial Instruments
Contracts of derivative financial instruments as of December 31, 2005 and 2004 are as follows:(In millions of Won)
Trading
Foreign currency related contracts
Forward contracts
Future contracts
Swap contracts
Option contracts purchased
Option contracts soldInterest rate related contracts
Future contracts purchased
Future contracts sold
Swap contracts
Option contracts purchased
Option contracts soldIndex option related contracts
KOSPI 200 futures
Option contracts purchased
Option contracts sold2005
Hedging

Total

Trading

2004
Hedging

Total

21,706,315
237,245
4,406,534
1,389,356
2,788,144
30,527,594-

21,706,315
237,245
4,406,534
1,389,356
2,788,144
30,527,594

16,491,751
162,624
3,128,638
1,698,416
1,358,540
22,839,969-

16,491,751
162,624
3,128,638
1,698,416
1,358,540
22,839,969

260,378
10,032,918
10,293,296

433,564
433,564

260,378
10,466,482
10,726,860

56,447
1,445,254
7,495,779
140,913
154,482
9,292,875

104,380
104,380

56,447
1,445,254
7,600,159
140,913
154,482
9,397,255

24,386
172,576
1,013,858
1,210,820
42,031,710

433,564

24,386
172,576
1,013,858
1,210,820
42,465,274

17,964
39,10457,06832,189,912

104,380

17,964
39,10457,06832,294,292

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

Gain or loss on valuation of derivative for the year ended December 31, 2005 and the related accumulated gain or loss on them are as follows:(In millions of Won)
Valuation gains or losses (I/S)(*1)
Trading
Gains
Foreign currency related contracts
Forward contracts
Future contracts purchased
Swap contracts
Option contracts purchased
Option contracts soldInterest rate related contracts
Swap contracts
Option contracts purchased
Option contracts soldIndex option related contracts
Option contracts purchased
Option contracts soldValuation gains

Hedging

Losses

Gains

Total
Loss

Gains

or losses (B/S)
LossesAssetsLiabilities

210,144
34,153
22,179266,476

151,493
44,402
18,557
214,452--

210,144
34,153
22,179266,476

151,493
44,402
18,557
214,452

228,681
171,230
15,773415,684

346,571
94,233
11,237452,041

23,100348
23,44822,582
88
22,670

5,876
5,876

10,119
10,11928,976348
29,32432,70188
32,78974,64874,64895,767
95,767

12,564
12,564

13,47913,479--12,564
12,564

13,47913,479

6,334
6,334

104,836
104,836

302,488

250,601

5,876

10,119308,364

260,720496,666

652,644(*1) Included in gain and loss on foreign currency transactions which is treated as other operating income and expenses.

Gain or loss on valuation of derivative for the year ended December 31, 2004 and the related accumulated gain or loss on them are as follows:(In millions of Won)
Valuation gains or losses (I/S)(*1)
Trading
Gains
Foreign currency related contracts
Forward contracts
Swap contracts
Option contracts purchased
Option contracts soldInterest rate related contracts
Swap contracts
Option contracts purchased
Option contracts soldIndex option related contracts
Option contracts purchased
Option contracts soldValuation gains

Hedging

Losses

Gains

Total
Loss

Gains

or losses (B/S)
LossesLiabilities

250,206
194,297
30,289474,792

431,064
110,201
27,793569,058--

250,206
194,297
30,289474,792

431,064
110,201
27,793569,058

391,392
215,632
34,330641,354555,581
128,386
33,416717,383

56,742
1,276
58,018

71,117423
71,540

1,951
1,951

7,692
7,692

58,693
1,276
59,96978,809423
79,232

96,922
88
97,010111,917348
112,265

7,204
7,204

1,600
1,600

-

-

7,204
7,204

1,600
1,600

-

1,482
1,482

540,014642,198

1,951

7,692

541,965

649,890738,364

831,130(*1) Included in gain and loss on foreign currency transactions which is treated as other operating income and expenses.

74

AssetsKOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

74
75
The above transactions with respect to securities and bonds are for the purpose to hedge risks from changes in exchange rates or interest rates,
and to generate profits from trading derivative instruments.
Outstanding hedging transactions above include both derivative transactions accounted for using hedge accounting treatment and those held forthe purpose of hedging risk. As of December 31, 2005, hedged items consist of securities and bonds, and risks from change in fair values arehedged by interest rate swaps. Based on the valuation of the hedged items under fair value hedge accounting, gains and losses on valuation of
securities amounting to 1,053 million and 3,656 million, respectively, and gains and losses on valuation of bonds amounting to 9,067 million
and 2,220 million, respectively, have been accounted for as gains and losses on foreign currency transactions the year ended December 31,
2005.

(c) Litigation
The Bank is in litigation as the plaintiff or the defendant in various legal actions arising from the normal course of operation. The aggregate
amounts of these claims brought by and against the Bank were approximately 404,855 million (4,615 cases) and 66,102 million (147 cases),
respectively, as of December 31, 2005. The Bank recognized 4,767 million of other liability related to these lawsuits. The Bank believes that theoutcome of these matters will not have a material impact to the Bank’s financial position or operations.
Also the Bank had floating rate bonds of US$7,000 thousand (book value US$3,500 thousand) issued by Pacific Elephant Fund, and made aguarantee-payment amounting to US$10,112 thousand (US$10,112 thousand of provisions) in association with the default of Pacific Raninbow
fund for which the Bank has provided guarantee. The Bank brought a case to court in relation to the breach of performance of commitment
against the Dongbuanam Semiconductor. On October 27, 2005 compulsory arbitration by court was determined. According to the arbitration,
Dongbuanam semiconductor Inc. is to repay US$4,382 thousand with unequal installment on floating rate bond issued by Pacific Elephant Fundfor 16 years from 2005 to 2020, and the Bank recognized aforementioned amount as receivables in foreign currency. The difference between
aforementioned amount and the book value amounting to US$882 thousand was accounted for as recovery of impairment losses on available-forsales securities. Payment of US$14,369 thousand on behalf of the Pacific Rainbow Fund will be repaid by Dongbuanam semiconductor Inc. withan unequal installment for 16 years from 2005 to 2020. Above repayment related to Pacific Elephant Fund is to be distributed to Shinhan
merchant bank, Choongang mernchant bank and the Bank at the rate of amount of principal according by mutual agreement on January 10, 2006.
The Bank recognized US$7,138 thousand, distributed amount at the rate of amount of principal, as account receivable in foreign currency, andreversed US$7,138 thousand of related provision. Also the guarantee-payment amounting to US$2,974 thousand which cannot be repaid by
Dongbuanam semiconductor Inc. was charged off.
As of December 31, 2005 the Bank recognized US$11,315 thousand of account receivable in foreign currency excluding US$205 thousand of
repayment during 2005 and US$2,009 thousand of provision related to aforementioned receivables. The actual loss may differ from the provision
for account receivable losses set by the Bank.

(d) Asset Backed Securitization
On March 30, 2001, the Bank sold certain non-performing loans of leasing companies amounting to 589,175 million to a Special Purpose
Company (“5th SPC”) and received 300,000 million and 123,175 million in cash and subordinated bonds, respectively.
On June 29, 2001, the Bank sold certain non-performing loans amounting to 998,923 million to a Special Purpose Company (“6th SPC”) andreceived 200,000 million and 182,301 million in cash and subordinated bonds, respectively. In relation to this asset backed securitization(“ABS”), the Bank provided deposits equivalent to 40,800 million as collateral to Kookmin Bank.
On November 29, 2001, the Bank sold certain non-performing loans amounting to 163,750 million to a Special Purpose Company (“7th SPC”)
and received 37,022 million and 36,100 million in cash and subordinated bonds, respectively. According to the business transaction
agreement (the “Agreement”), the transferee and the trustee could claim damages arising from the transferor’s performance of a duty to thedefault collateral within the limit of the contract amount when the securitized asset becomes unqualified under the conditions of the written
contract or when the asset value is reduced arising from a significant misstatement as a result of a due diligence report for the assets or when
the debtor delayed the payment of the principal for more than six months. Also, when the duty to perform arises, the Bank should pay the damage
amount to the transferee with cash within seven business days from written notification.
On December 9, 2003, the Bank sold certain non-performing loans amounting to 155,391 million to a Special Purpose Company (“8th SPC”) andreceived 60,000 million and 59,000 million in cash and subordinated bonds, respectively, in relation to this asset-backed
securitization (“ABS”).

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

On June 17, 2004, the Bank sold certain non-performing loans amounting to 206,442 million to a Special Purpose Company (“9th SPC”) andreceived 80,000 million and 70,000 million in cash and subordinated bonds, respectively, in relation to this asset-backed securitization(“ABS”).
On September 17, 2004, the Bank sold certain non-performing loans amounting to 147,464 million to a Special Purpose Company (“10th SPC”)
and received 55,000 million and 45,000 million in cash and subordinated bonds, respectively, in relation to this asset-backed
securitization (“ABS”).
On June 13, 2005, the Bank sold certain non-performing loans amounting to 207,886 million to a Special Purpose Company (“11th SPC”) andreceived 80,000 million and 65,000 million in cash and subordinated bonds, respectively, in relation to this asset-backed securitization(“ABS”). The difference between the book value and the sales price amounting to 6,619 million was recognized as a gain on disposal of loans forthe year ended December 31, 2005.
On November 28, 2005, the Bank sold certain non-performing loans amounting to 178,587 million to a Special Purpose Company (“12th SPC”)
and received 70,000 million and 66,000 million in cash and subordinated bonds, respectively, in relation to this asset-backed securitization(“ABS”). The difference between the book value and the sales price amounting to 12,117 million was recognized as a loss on disposal of loans
for the year ended December 31, 2005.
According to the business transfer agreement (the "Agreement) of 8th, 9th, 10th, 11th and 12th SPC, the transferee and the trustee could claim
the performance of transferor's responsibility on the collateral pursuant to the contract amount when (1) the securitized assets are consideredunqualified as of the transfer or confirmed date under the conditions of the written contract, (2) it was determined that senior rights on thecollaterals stated in the register book were not identified at the time of the due diligence on the securitized assets, or (3) additional senior rights
are identified according to the laws or regulations omitted from the due diligence report (only if the laws or regulation were in effect prior to theconfirmation date of the securitized assets). The Bank is obligated to perform its responsibility on the collateral within three business days fromthe date the request is made by transferee or trustee.
The Bank’s potential exposures in relation to the indemnification on the securities assets for 5th, 6th, and 7th SPC are 27%, 34% and 36% of thetotal proceeds, respectively which is equivalent to US$84,000 thousand ( 85,092 million), 130,000 million, and 26,000 million, respectively.

(e) Loans Sold under Repurchase Agreements
The Bank is obliged to repurchase some of the loans previously sold to the Korea Asset Management Corporation (“KAMCO”) under certain
conditions including the following:- When it is considered impossible to collect the loans and interest because borrowers delaytheir repayment of loans and interest over six
months.
- When it is considered impossible to collect the loans and interest due to the abrogation of court-receivership process and the cancellation ofmediation.
As of December 31, 2005, KAMCO and other loan purchasers may exercise the resale option for loans amounting to 201,292 million. An
additional loss or profit may occur, depending on the loan classification on valuation of loans or final arrangement on loans when KAMCO andother loan purchasers exercise their repurchase agreement.

(f) Debt to Equity Swap of Hynix Semiconductor Inc.
The Bank’s outstanding loans (including payment guarantees) and available-for-sale securities including debt-to-equity securities with respect toHynix Semiconductor Inc. (“Hynix”) amount to 178,886 million and 1,426,115 million, respectively, as of December 31, 2005. As of December
31, 2005, the Bank’s loan for Hynix is classified as normal.
On April 21, 2005, Hynix and the Creditors’ Council agreed to the condition that includes a certain amount of external financing and a new
agreement to satisfy for an early termination of Joint Management with the Creditors’ Council. Hynix fulfilled the condition and terminated Joint
Management with the Creditors’ Council on July 12, 2005 after achieving more than 1.0 trillion of external financing and the new agreement on
which Hynix is required to have prior discussions with Creditors’ Council on management appointment, issues related with M&A, and othersignificant management decisions which may have great influence to Hynix. In addition, the Bank sold 18,416,307 shares of Hynix, which ispermitted to sale in over-the-counter market by Financial institution creditors committee, at 350,146 million on October 26, 2005.

76

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

76
77(g) Loans to Workout Companies
As of December 31, 2005, the Bank’s outstanding loans and guarantees to the companies under workout programs amounted to 965,300
million. Actual losses on the above loans and guarantees may differ from the allowances for such losses provided by the Bank. No adjustments
have been made in the accompanying non-consolidated financial statements related to such uncertainties.

(h) Debt to Equity Swap of SK Networks Co., Ltd.
As of December 31, 2005, the Bank has loans of 171,423 million and available-for-sale securities of 95,484 million with respect to SK
Networks Co., Ltd. and set allowance for loan losses and payment guarantees of 16,780 million in association with these loans. The actual loss
may differ from the allowance for loan losses and impairment loss set by the Bank.

(i) Commitments Related to Credit Card Business
The Bank has entered into trademark license (membership) agreements with Master Card International Incorporated in 1993, VISA International
Service Association in 1988 and JCB International Service Association in 1997. The Bank pays and receives certain amounts of fees andcommissions in connection to the income and expense incurred pertaining to these agreements.
The Bank has entered into credit card affinity agreements with KDB Capital. Under the agreements, the Bank gives an allocation of the fee
income related to the credit card affinities.

(j) Asset Backed Securitization Related to Credit Card Business
Credit card receivables from cardholders provided to SPCs as of December 31, 2005 are summarized as follows:(In millions of Won)SPC
KEBCS Securitization 2002-7,
L.L.C. (the “SPC 7”)

Transferred(entrusted)amountAssets provided
Cash advances andrevolving purchases

403,804

Date oftransfer(entrusted)
2003.01.13

Remainingbalance
184,375

The Bank is responsible for possible delinquencies in the underlined assets of the SPCs and additional assets should be provided to the SPCs if
the remaining balances of the underlined assets fall below the stipulated amounts.
Additional assets which had been transferred or entrusted to the SPCs up to December 31, 2005 are summarized as follows:(In millions of Won)SPC
KEBCS Securitization 2002-7,
L.L.C. (the “SPC 7”)

Period2003.5.16~2004.7.30

Frequency

No. ofcardholders

8

125,874

Amount301,348

Type
Trust type

Assets which had been extracted from SPC and transferred back to or repurchased by the Bank up to December 31, 2005 are summarized asfollows:(In millions of Won)SPC
KEBCS Securitization 2002-7,
L.L.C. (the “SPC 7”)

Period2004.3.29~2005.4.11

Frequency
3

No. ofcardholders
104,514Amount158,739

Type
Written-off/
overdue loanAlso, profits from the SPC 7, net of the expenses of the Trust for each settlement period, are accounted for as interest income by the Bank.
The senior bonds and the subordinated bonds of the SPC 7 th , amounting to 100,000 million and 50,500 million respectively, were repaid on
January 23, 2006, after the balance sheet date. The Bank expired the asset backed securitization contracts by recovering the trusted assets
amounting to 187,362 million from the Kookmin Bank and the SPC 7 th is in liquidation.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(k) Indemnification Obligations regarding the Share Subscription Agreement by and between the Bank and the LSFKEB Holdings, SCA
The Bank shall indemnify the LSF-KEB Holdings, SCA for all purchaser losses (*1) and pay for damages resulting from any breach by the Bank of
any of the Bank’s covenants (*2) in the Share Subscription Agreement. The Bank’s indemnification obligations are as follows:
Duration of Indemnification Obligations are as follows:- Purchaser losses, excluding those mentioned below, may be indemnified until 18 months following the Closing Date (*3).
- Purchaser losses arising as a result of fraud or intentional misrepresentation by the Bank may be indemnified at the Closing Date andcontinue to be in full force and effect until three years following the Closing Date.
- Purchaser losses related to tax matters may be indemnified at the Closing Date and continue to be in full force an effect until five years
following the Closing Date.
The Bank’s indemnification obligations expire after the duration periods stated above. However, if the Bank receives written claims from Lone
Star before the expire of the durations, regardless of the durations stated above, the Bank’s indemnification obligations continue to be in force
and effect until the related matter are brought to satisfactory settlement.
The Bank has no indemnification obligation for claims less than 100 million. The Bank’s indemnification obligation applies to claims exceeding
15,000 million cumulative, and only losses exceeding 10,000 million may be indemnified.
The total amount of indemnification obligations cannot exceed the LSF-KEB Holdings, SCA’s investments in the Bank.
(*1) Purchase losses means the amount of any and all losses, costs, liabilities, damages, judgments, settlements and expenses that arise out of any breachby the Bank of any of the Bank’s representations and warranties contained in the Share Subscription Agreement or any breach by the Bank of any of theBank’s covenants or agreements in the Share Subscription Agreement.
(*2) Covenant means the conditions set forth in the Share Subscription Agreement that the Bank shall comply with the share subscription until the Closing
Date.
(*3) Closing Date means the date that the new shares come into effect, and falls on October 31, 2003.

(21) The equity linked special incentive
On July 15, 2005, the Bank granted the equity linked special incentive to employees for the purpose of motivation to improve a long-term result.
Above incentive is one time incentive which is linked with the Bank’s stock price and net asset per share, and can be eligible for the incentive forthree years after two years from the effective date. The Bank recognized 8,947 million as compensation expense for the accomplishment overthe long period related to above bonus and 8,943 million is recognized as long-term payables.

(22) Fees and Commissions
Fees and commissions for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Commissions received
Guarantee fees
Early termination penalty fees (note 32)
Others78

2004
392,407
19,871
6
116
412,400

417,896
23,67519103441,693

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

78
79(23) Operating Revenue of Merchant Banking AccountOperating revenue of merchant banking account for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Interest income
Fees and commissions income
Reversal of allowance for loan loss
Others2004
43,515432
1,973
17,08063,00063,387
777
242
8,399
72,805(24) Commission Charges
Commission charges for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005

Service fees
Others2004
66,883
141,876
208,759

38,605
164,311
202,916(25) Operating Expenses of Merchant Banking Accounts
Operating expenses of merchant banking accounts for the years ended December 31, 2005 and 2004 are as follows:
2005
Interest expense
Others(In millions of Won)
2004

35,793
13,71949,51247,416
4,627
52,043(26) General and Administrative Expenses
General and administrative expenses for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Salaries
Employee benefits
Provision for retirement and severance benefits
Depreciation
Amortization
Tax and dues
Rent
Entertainment
Advertising
Others2004
431,264
174,172
60,375
95,147
19,641
37,66535,15913,09433,011
156,147
1,055,675

400,884
100,149
54,233
104,551
9,147
32,46534,643
10,332
17,598137,248
901,250(27) Income Taxes(a) The Bank is subject to a number of income taxes based on taxable earnings which result in the following normal tax
rates:
Taxable earnings
Up to 100 million
Over 100 million

Prior to 2005

Thereafter
16.5%
29.7%

14.3%
27.5%

Effective in December 2003, the Korean government reduced the corporate income tax rate beginning in 2005. Specifically, effective from January
1, 2005, the income tax rate was reduced from 29.7% to 27.5%. The current income tax expenses represent income taxes paid by overseas
branches.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(b) The components of income tax expense (benefit) for the years ended December 31, 2005 and 2004 are summarized
as follows:(In millions of Won)
2005
Current
Change in deferred taxes
due to temporary differences
Change in deferred taxes
due to loss carry forward
Income taxes directly
applied to shareholders’ equity

2004
6,352

9,451

(166,143)-(134,410)-(294,201)

9,451(c) Details on adjustments for certain differences between amounts reported for financial accounting and income tax
purposes for the year ended for December 31, 2005 and 2004 are as follows,(In millions of Won)
2005
Temporarydifferences
Inclusion in gross revenue
and exclusion from loss
Allowance for guarantees
Interest not recognized in prior year
Valuation of trading securities
Valuation of available-for-sales
securities
Valuation of derivatives instrument
Other allowance for possible losses
Taxes and dues
OthersInclusion to loss
and exclusion from gross revenue
Allowance for guarantees in prior year
Overaccrued allowance
for loan losses in prior year
Interest not recognized
Valuation of securities
Valuation of Held-to-maturities
Valuation of derivatives instrument
Debt-to-equity securities
converted in prior year
Present value discount
Dividend on securities
Gains from liabilities exempted
Taxes and dues
Others2004
Not temporary
differences

Temporarydifferences

Not temporary
differences

40,676
100,561
460,630-

18,982
161,874
605,979-

28,47742,285
236,673
116,829
1,026,131

21,70321,70337,5581,030,929
68,36826,6491,950,339

9,451
211,657
221,108

18,982-

54,200-114,307736,063
38,650--1,774,709
100,561
953,327
19,733
944,720-

179,120
8,443
114,372
1,209,937

4,421
294,201
7,017
305,639

14,747
11,401
152,808
4,026,206

2,431
16,174
7,923
26,528(d) Details on deferred tax asset and liabilities and income taxes directly applied to shareholders’ equity are as follows,(In millions of Won)
AmountValuation of available-for-sales securities
Valuation of held-to-maturity securities
Unrealized gains on investment in affiliates
Unrealized loss on investment in affiliates

80

1,939,744(926)
21,920(1,172)
1,959,566

Deferred tax assets
and liabilities

Income Taxes-(533,430)
255(6,028)322(538,881)

108,367

Valuation of derivatives

6,941

401,936---

Deferred tax liabilities as of 31, Dec, 2005

Deferred tax assets as of 31, Dec, 2005 (*2)

Set off amountDeferred tax assets (foreign branches)

Total deferred tax liabilities(*2) This amount was not set off with deferred tax libilities because it was related with foreign branches and was different from others in tax authority.

(*1) This amount included additional retention resulted from tax adjustment after appropriation of prior preiod’s financial statements-

529,405-

463,525

1,461,584---

1,925,109-

Tax deduction

Loss carry-forward(34,697)559(34,138)

270(34,408)

6,941

127,469

21,936(168,818)

298,073

247,526--734

21,936(119,005)

79,768(613,883)

1,083,897

900,091

2,668

79,768126,02231,027(560,817)

-

-

(856)

(146)

75,444-

96,058--60,991(560,817)

458,260(2,039,334)

-

-

-

-

-

112,824

(856)

(146)

49,258

-

-

-

-

-

124,702(414)

41,429
(141)

(414)

29,801

41,4292,322-

15,035

5,220

11,186(31,434)(3,928)10,050126,673-(27,654)(1,513)

8,338

202,417

11,186(31,434)(2,290)6,318

126,673-349,300(3,112)(432,745)

-

-

-

-

Valuation losses of securities

221,784

179,120

-

(531)

(141)

(1,504)(514)
274,343

29,801150,652

108,367-(1,504)-

5,220
17,357

150,652-

54,673-(27,654)

40,676(114,307)(100,561)

11

(101)

824

Dec.31. 2005

(In millions of Won)
Deferred tax assets (liabilities)
Translation
adjustment
Increase
Decrease(3,162)

12,171

8,443(14,285)

36,545201,593

460,630(5,503)30,321

736,061

Jan.1. 2005

Dec.31. 2005

18,982

40,676(114,307)(8,330)22,974

460,630(2,039,334)

Others

-

-

-

-

-

-

-

-

41

(367)

2,994

Valuation gains of securities(3,112)(531)

453,463translation

Deferred loss foreign currency(foreign branches)

Deferred tax asset

Loans charged off(514)

63,116

Gain from trading of derivatives

18,982and acceptance(100,561)(11,499)

44,259733,067

Present Value discountAllowance for guarantees

Interest not recognizedHeld-to-maturity securities

Valuation gains of

Held-to-maturity securities

Valuation losses ofValuation of Securities

Jan.1. 2005(*1)

Temporary Diffreences
Translation
adjustment
Increase
Decrease(e) The changes in temporary differences, deferred tax assets and deferred tax liabilities are as follows.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

80
81

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(f) The Bank expected deductible temporary differences (including the carry-forward of unused tax losses) could be
utilized by sufficient taxable temporary differences and future taxable income in the same period. Accordingly, theBank recognized a tax benefit in amount of 300,553 million which was reflected by changes of temporary differences
including unrecognized deferred tax assets till 2004.
(g) Change in Accounting Policy
Pursuant to SKAS No. 16 "Income Taxes” , effective January 1, 2005, deferred taxes are recognized on the temporary differences related tounrealized gains or losses on investment securities that are reported as separate component of capital adjustment. As a result of such change,
capital adjustment decreased by 538,881 million and deferred assets and liabilities increased by 577 million and 539,458 million,
respectively. These changes did not have any impact on the reported net income and prior year’s financial statements were not restated by SKAS
No. 16 "Income Taxes.”(h) Expiration dates allowed for tax loss carry forwards in accordance with Korean corporate income tax law to reduce
the future taxable income are as follows:(In millions of Won)
Year incurred

Balance ofDecember 31,2004

2000
2001
2004

712,269
75,3181,137,522
1,925,109

Deduction

Balance ofDecember 31,2005(712,269)(75,318)(673,997)(1,461,584)

Expiration

463,525
463,525

2005
2006
2009

(28) Earnings Per Share and Ordinary Earnings Per Share
Basic earnings per share and ordinary earnings per share for the years ended December 31, 2005 and 2004 are calculated as follows:(a) Earnings Per Share(In millions of Won)
2005
Net income
Net income allocated to common stock
Weighted average number of commonshares outstanding (in share)
Basic net earning per share (in Won)

2004
1,929,327
1,929,327

522,067
522,067

644,906,826
2,992

643,939,890
811(b) Basic Ordinary Earnings Per Share(In millions of Won)
2005
Net income
Extraordinary gain
Ordinary income allocated to common stock
Weighted average number of commonshares outstanding (in shares)
Basic ordinary earning per share (in Won)

82

2004
1,929,327(16,690)
1,912,637

522,067(17,675)
504,392

644,906,826
2,966

643,939,890
783

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

82
83
Diluted earnings per shares and diluted ordinary earnings per share for the years ended December 31, 2005 and 2004 are calculated as follows:(c) Diluted Earnings Per Share(In millions of Won)
2005
Net income allocated to common stock
Compensation expense
associated with stock options
Diluted net income
Weighted average number of commonshares before diluted (in shares)
Dilutive shares
Diluted weighted average number ofcommon shares outstanding (in shares)
Diluted earnings per share (in Won)

2004
1,929,327

522,067100
1,929,427

522,067

644,906,826
346,625

643,939,890
143,322645,253,451
2,990

644,083,212
811(d) Diluted Ordinary Earnings Per Share(In millions of Won)2005
Diluted net income
Extraordinary gain
Diluted ordinary income
Weighted average number of commonshares before diluted (in shares)
Dilutive shares
Diluted weighted average number ofcommon shares outstanding (in shares)
Diluted ordinary earning per share (in Won)

2004
1,929,427(16,690)
1,912,737

522,067(17,675)
504,392

644,906,826
346,625

643,939,890
143,322645,253,451
2,964

644,083,212
783(e) Potential common share information as of December 31, 2005 is as follows:

Stock options

Exercise period

Number of common share to be issued upon conversion

From March 26, 2003
to June 29, 2010

4,680,120(29) Statements of Cash Flows
The Bank considers cash on hand, deposits and highly liquid marketable securities with original maturities of three months or less to be cash andcash equivalents. Cash and cash equivalent as of December 31, 2005 and 2004 are as follows:(In millions of Won)2005
Cash on hand
Deposits in Won
Deposits in foreign currencies
Marketable securities

2004
1,658,212
412,117810,369
170,311
3,051,009

1,507,374
336,238
740,5819,331
2,593,524

Significant non-cash transactions for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)2005
Decrease in loans by charge-off
Gain/loss on investment securities(capital adjustment)
Domestic exchange settlement
Transfer from the merger with KEBCS

2004
578,655

2,779,106

810,580
3,402,976-

289,195
2,507,072
2,951,095

84

435,034

152,680

62,2992,523-

34,851

229,115340,648

1,695
19,594

9,908

2,837

1,999
1,641

910

4,125
932

14

459

12,917

2,939

15
1,999

-

925

Others

-

1,049

-

-

3,071
2,373
-

817

-

698

-

-

-

-

Commission charges in foreign currency

5,858

449
-

232

126
910

-

-

3,893
-

7

14

-

459

30,241

10,506
55
6,111

9,908

126
1,093

3,078

274
5,393

143
4,011

4

-

4,072

-

643

Commission charges in won

Interest expenses in foreign currency

Expenses:

Others

14,261

6,035

677
409

2,614

-

2,669

2,505

2,777

-

372

4

271

290

-

-

Fees and commissions

179,581

21

2,707

39,093

1,402

104,642

14,984
179,581-

4

38,873

1,091

-

-

6,937

2,025

-

-

34,851

Interest income in foreign currency

Interest income in Won

Revenues:

OthersBorrowings in foreign currency

54,807

73
6,818

-

-

16
-

15
2,688

220

555

42
456

-

-

Deposits in foreign currency

2,899

-

-

79,2435,000

84,12465,582851

47,554

Deposits in Won

Liabilities:

29,500355,445

152,680

-

-

-

5,000

352

-

-

73,331

81,52824,500-4,024
46,065

-

-

4,865

-

Total

-

Others

-

Trust

1,047

KEBFC

470

KEBD

2,126

KEBDAG--

Loans in Won

40,730

-

KEBC

851

KEBOC

47,554-

Others-in foreign currency
Loans in foreign currency

Due from banks

Assets:

KEBA(In millions of Won)

Significant transactions made in the normal course of business with subsidiaries during the year ended December 31, 2005 and related account balances as of December 31, 2005 aresummarized as follows:(30) Related Party Transactions

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

456,857

172,771

16

629

Others

16

629
-

-

-

Commission charges in foreign currency

Commission charges in won

Interest expenses in foreign currency

Expenses:

12,025

-

3,259

1,707

286

3,677

1

-

4,946

960

4,402
-

3,259
-

1,481

286
206

-

2,677

3,471

1,490

203
23,500

1,707

-

9
-

57
2,638

14,811

949

1,359

-

-

-

-

1,506

6,460
15,0662,564

14,428

638

17

383

1,771

405,521

3,564
97,236

-

1

960

-

-

146
2,184

-

22

31

Others

-

-

-

1,359

1,506

978

-

-

-

22

311

-

-

1,060

-

-

-

31

-

Fees and commissions

Interest income in foreign currency

Interest income in Won

Revenues:

5,060

45,648

180,479

2,520

9,339

174,02982

213,205

1,312

97,236

61,593

4455

28,422-44,883151,075

2,026

146

82

OthersBorrowings in foreign currency
-

8,570

61,593

9,717

-

-

-

-

-

30
5,026

310

982

494

9,193

-

-

2,252

-

1,907

84,0155,000

82,69744,408-

9,535
96,330

335
5,428

-

-

1,907

5,000

38,621

443

167

-

16,796334,196

167,008

-

7,770
-

Total

-

Others-Trust

37,624

KEBFC

4,203

KEBD

78,0514,200-

KEBDAG-

40,041

-

KEBC

-

KEBIT

Deposits in foreign currency

1,024

65,035--626

49,764

398

4,425

KEBOC

10,846

KEBA

Deposits in Won

Liabilities:

OthersLoans in Won

Loans in foreign currency

in foreign currency

Due from banks

Assets:(In millions of Won)

Significant transactions made in the normal course of business with subsidiaries during the year ended December 31, 2004 and related account balances as of December 31, 2004 aresummarized as follows:

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

84
85

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(31) Assets and Liabilities Bearing Interest
Assets and liabilities bearing interest income and interest expense for the year ended December 31, 2005 are as follows:(In millions of Won)
Average balance

Interest income
and expenses

Average annualinterest rate

Assets:Due from banks (*1)

1,023,126

Securities (*2)
Loans (*3)

25,976

2.54%

11,160,437

450,898

4.04%

39,879,579

2,768,942

6.94%

52,063,142

3,245,816

6.23%

Liabilities:
Deposits

38,338,817

935,327

2.44%

Borrowings

7,356,515

209,208

2.84%

Debentures

5,853,405

333,993

5.71%

51,548,737

1,478,528

2.87%(*1) The reserve deposit with the Bank of Korea and due from the Bank of Korea in foreign currencies were excluded.
(*2) Equity securities and beneficiary certificates were excluded.
(*3) Loans for debt-to-equity swap were excluded.

Assets and liabilities bearing interest income and interest expenses for the year ended December 31, 2004 are as follows:(In millions of Won)
Average balance

Interest income
and expenses

Average annualinterest rate

Assets:Due from banks (*1)

1,483,699

23,211

1.56%

Securities (*2)

10,738,396

521,290

4.85%

Loans (*3)

40,738,010

2,791,603

6.85%

52,960,105

3,336,104

6.29%

Deposits

40,828,716

1,036,313

2.54%

Borrowings

6,511,210

157,174

2.41%

Liabilities:

Debentures

6,154,669

431,456

7.01%

53,494,595

1,624,943

3.04%(*1) The reserve deposit with the Bank of Korea and due from the Bank of Korea in foreign currencies were excluded.
(*2) Equity securities were excluded.
(*3) Loans for debt-to-equity swap were excluded.

86

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

8687(32) Operation Performance of Trust Accounts
The significant financial information relating to trust accounts for the years ended December 31, 2005 and 2004 are as follows.

(In millions of Won)
2005
Trust commissions
Trust fees for monetary trusts
Trust fees for securities investment trusts
Commissions received from early termination ofcommodities in trust account2004
19,935
4,777
24,712

23,526
4,156
27,682619(33) Added Value
The details of costs constituting value added expenses for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Salaries
Employee benefits
Provision for retirement and severance benefits
Severance for early retirements
Depreciation
Amortization
Taxes and dues
Rent

2004
431,264
174,172
60,375
3,151
95,147
19,641
37,66535,159856,574

400,884
100,149
54,23389,592
104,551
9,147
32,46534,643825,664(34) Merger with Korea Exchange Bank Credit Service
Prior to February 28, 2004, the Bank was the largest shareholder of KEBCS. Specifically, the Bank owned 43,838,938 shares of KEBCS amounting
to 68.6% of its total equity. On February 28, 2004, the Bank acquired all other shares of KEBCS. The Bank issued 0.533689 share of common stockof the Bank per the share of KEBCS to the KEBCS shareholders who were included in the shareholders list as of February 28, 2004, according to
the merger agreement. The total number of shares distributed to such KEBCS shareholders amounted to 5,981,895 shares.
Since this acquisition fell under the parent-subsidiary type, the assets and liabilities of KEBCS were transferred based on the book value as ofFebruary 28, 2004. The net loss incurred by KEBCS prior to the acquisition amounting to 111,505 million has been accounted for as loss fromvaluation using equity method by the Bank. The buy out of the minority shareholders’ amounting to 35,445 million was reflected to theaccumulated deficit in 2004. The par value of common shares of the Bank was 29,909 million and reflected as a capital adjustment.

KOREA EXCHANGE BANK (BANKING ACCOUNT)NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

KEBCS was initially established on May 19, 1988, in accordance with Credit Specialized Finance Business Act, as Korea Exchange Bank Credit
Card Co., Ltd. with the contribution from the Bank with an aim to formulate a credit based society, provide convenient financial service forcustomers and further promote the domestic economic development. The name of Company was changed to KEBCS on January 1, 1992, and its
core business - credit card issuance, usage, and payment service - was extended to installment finance service through the merger with Korea
Exchange Bank Installment Finance Co., Ltd. on January 1, 1999. KEBCS was listed on Korea Stock Exchange on December 21, 2001.
Total assets and liabilities of KEBCS as of February 28, 2004 were

3,063,203 million and

3,982,986 million, respectively.

(35) Results of Operations for the 4th Quartersth

The results of operations for the 4 quarters of the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)2005
Operating revenue
Operating expenses
Operating income
Non-operating income
Non-operating expenses
Net income
Earnings per share in Won

88

2004
1,648,349
1,485,458
162,891
368,604
87,262759,876
1,178

2,268,698
2,189,878
78,820107,372
70,011
132,505
205

KOREA EXCHANGE BANK (BANKING ACCOUNT)INTERNAL ACCOUNTING CONTROL SYSTEM REVIEW REPORT
English translation of a Report Originally Issued in Korean

Representative
Korea Exchange Bank:
We have reviewed the report of management’s assessment of internal accounting control system(IACS) of Korea Exchange Bank (the Bank) as ofDecember 31, 2005. In accordance with Article 2-2 of the Act on External Audit for Stock Companies (the External Audit Law) of the Republic ofKorea, the Bank’s management is responsible for assessing the design and operation of its IACS.
Our responsibility is to review management’s assessment and issue a report based on our review.
We conducted our review in accordance with Article 2-3 of the External Audit Law. Our review included inquiries of management and employees,
inspection of related documents and checking up on the operating status of the Bank’s IACS. We did not perform an audit of the Bank’s IACS andaccordingly, we do not express an audit opinion.
Based on our review, no material weakness in the design or operation of the Bank’s IACS under Article 2-2 of the External Audit Law as ofDecember 31, 2005 has come to our attention.
This report applies to the Bank’s IACS in existence as of December 31, 2005. We did not review the Bank’s IACS subsequent to December 31,
2005. This report has been prepared for Korean regulatory purposes, pursuant to the External Audit Law, and may not be appropriate for otherpurposes or for other users.
As this report is based on Interim Guidelines on Auditors’ Review and Report on Management’s Assessment of IACS, issued by the Korean Audit
Standards Committee on March 29, 2005, it applies only from that date until the date the Final Standard for Management’s Assessment of IACS
and Final Standard for Auditors’ Review and Report on Management Assessment of IACS become effective. A review performed based on the final
standards may have different results and accordingly, the content of our report may be different.

Seoul, Korea
January 26, 2006

Notice to ReadersThis report is annexed in relation to the audit of the financial statements as of December 31, 2005 and the review of internal accounting control
system pursuant to Article 2-3 of the Act on External Audit for Stock Companies of the Republic of Korea.

88
89

KOREA EXCHANGE BANK AND SUBSIDIARIESCONSOLIDATED INDEPENDENT AUDITORS’ REPORT

Independent Auditors’ Report
Based on a report originally issued in Korean
To the Board of Directors and Shareholders of Korea Exchange Bank:
We have audited the accompanying consolidated balance sheets of Korea Exchange Bank (the “Bank”) and subsidiaries as of December 31, 2005 and2004, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years then ended, expressed in
Korean Won. These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Bank andsubsidiaries as of December 31, 2005 and 2004, and the results of their operations, the changes in their shareholders’ equity and their cash flows forthe years then ended in conformity with accounting principles generally accepted of the Republic of Korea.
The accompanying consolidated financial statements as of and for the years ended December 31, 2005 and 2004 have been translated into UnitedStates dollars solely for the convenience of the reader and have been translated on the basis set forth in Note 3(b) to the consolidated financial
statements.
Without qualifying our opinion, we draw attention to the following:
As discussed in note 3(a) to the accompanying consolidated financial statements, accounting principles and auditing standards and their applicationin practice vary among countries. The accompanying consolidated financial statements are not intended to present the financial position, results ofoperations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea.
In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally
accepted and applied in other countries. Accordingly, this report and the accompanying consolidated financial statements are for use by thoseknowledgeable about Korean accounting procedures and auditing standards and their application in practice.
As discussed in note 19(f) to the accompanying consolidated financial statements, the Bank’s outstanding loans (including payment guarantees) andavailable-for-sale securities with respect to Hynix Semiconductor Inc. (“Hynix”) amount to 178,886 million and 1,426,115 million, respectively asof December 31, 2005 and the loans are classified as the normal according to the loan classification. As a result, the joint management agreement
was terminated on July 12, 2005. In addition, the Bank sold 18,416,307 shares of Hynix, which is permitted to sale in over-the-counter market by
Financial Institution Creditors Committee, at 350,146 million on October 26, 2005. KEB Capital Co.Ltd., the Bank’s consolidated subsidiary, sold
681,000 shares of Hynix at 12,942 million on October 26, 2005.
As discussed in note 5(f) to the accompanying consolidated financial statements, on February 18, 2005, the Bank sold whole shares (2,760 thousand
shares) of KEB Commerz Investment Trust Management Co., Ltd., a domestic subsidiary of the Bank, to Landmark Investment Trust Management
Co., Ltd. for 28,043 million.

KPMG Samjong Accounting Corp.
Seoul, Korea
February 17, 2006

This report is effective as of February 17, 2006, the audit report date. Certain subsequent events or circumstances, which may occur between theaudit report date and the time of reading this report, could have a material impact on the accompanying financial statements and notes thereto.
Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect
the impact of such subsequent events or circumstances, if any.

90

KOREA EXCHANGE BANK AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004

In millions of Won,except share data
2005

In thousands of U.S Dollars,except share data

2004

2005

2004

AssetsCash and due from banks (notes 4 and 27)

3,123,260

2,789,231

Securities (note 5)

13,339,115

42,885,394$

3,083,179

2,753,436

12,983,037

13,167,932

12,816,423

41,169,228

42,335,038

40,640,896

Loans, less allowance for loan losses
of598,422 in 2005 and912,467 in

2004, less net deferred loan fees and costsof

2,667 in 2005 and1,271 in 2004

(notes 6 and 27)
Fixed assets, less accumulated
depreciation of
and691,004 in 2005

716,223 in 2004 (notes 8 and 15)

973,359

947,334

960,868

935,177

6,262,904

5,241,209

6,182,531

5,173,948

66,584,032

63,130,039$

65,729,548

62,319,880

Deposits (notes 10 and 27)

40,738,073

41,256,864$

40,215,274

40,727,408

Borrowings (notes 11 and 27)

6,757,283

6,151,222

6,670,566

6,072,282

Debentures (note 12)

5,978,925

6,566,878

5,902,196

6,482,604

Other liabilities (notes 14 and 27)

7,426,649

6,202,506

7,331,342

6,122,908

60,900,930

60,177,470

60,119,378

59,405,202

3,224,534

3,224,534

3,183,153

3,183,153

-

-

-

-

Retained earnings (accumulated deficit) (note 16)

1,358,864(567,312)

1,341,426(560,031)

Capital adjustments (note 17)

1,098,558

286,963

1,084,460

283,280

1,146

8,384

1,131

8,276

Total shareholders’ equity

5,683,102

2,952,569

5,610,170

2,914,678

Total liabilities and shareholders’ equity

66,584,032

63,130,039

65,729,548

62,319,880

Other assets (notes 9 and 27)

Total assets

Liabilities and Shareholders’ Equity

Liabilities:

Total liabilities

Commitments and contingencies (note 19)

Shareholders’ equity (note 1):
Common stock of

5,000 par value;

Authorized – 1,000,000,000 shares
Issued – 644,906,826 shares in 2005 and2004
Capital surplus (note 15)

Minority interests in consolidated subsidiaries

See accompanying notes to consolidated financial statements.

$

90
91

KOREA EXCHANGE BANK AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2005 and 2004

In millions of Won
2005

In thousands of U.S Dollars
2004

2005

2004

Operating revenue:
Interest income (note 27):
Interest on due from banks

31,34225,190Interest on trading securities

70,97657,085Interest on available-for-sale securities

311,640

Interest on held-to-maturity securities

110,338
2,891,860

Interest on loans
Other interest income

Fees and commissions (notes 21 and 27)$

30,94024,86770,06556,352

412,554

307,641

407,260

96,817

108,922

95,5752,934,111

2,854,748

2,896,457

24,53926,30324,22425,9653,440,695

3,552,060

3,396,540

3,506,476

437,158

538,644431,548531,732

94,29464,78093,08463,9482,676,791

2,585,812

2,642,439

2,552,628

14,80913,261

14,61913,091Other operating revenue (note 27):
Gain on disposition of trading securities
Gain on derivatives trading
and foreign currency exchange
Trust fees and commissions received
from trust accountReversal of allowance for acceptancesand guarantees-

35,088-34,63876,153105,953

75,175

104,5932,862,047

2,804,894

2,825,317

2,768,898

6,739,900

6,895,598

6,653,405

6,807,106Interest on deposits

999,457

1,133,596

986,631

1,119,048

Interest on borrowings

210,105

172,861

207,409170,643

Interest on debentures

335,813458,068

331,503452,190

OthersTotal operating revenue
Operating expenses:
Interest expenses (note 27):

Other interest expense

Commission charges (notes 22 and 27)

15,39013,473

15,192

13,3001,560,765

1,777,998

1,540,735

1,755,181

210,992

240,207

208,284

237,124

70,69333,75569,78633,322

2,468,539

2,346,867

2,436,860

2,316,749

43,3411,001,057

42,785988,210

Other operating expenses (note 27):
Loss on disposition of trading securities
Loss on derivatives trading
and foreign currency exchange
Provision for loan losses
Provision for allowance for acceptancesand guarantees
Provision for other liabilities
Others-21,369-77,687

120,70776,690121,236

104,567

119,680

103,225

2,847,732

3,563,933

2,811,187

3,518,196

1,086,460

954,037

1,072,517

941,794

Total operating expenses

5,705,949

6,536,175

5,632,723

6,452,295

Operating income

1,033,951

359,423

1,020,682

354,811

General and administrative expenses (note 23)92

21,647122,276

See accompanying notes to consolidated financial statements.

$

KOREA EXCHANGE BANK AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME, CONTINUED
Years ended December 31, 2005 and 2004

In millions of Won,except
earnings per share data

Non-operating income:

2005

92
93

In thousands of U.S Dollars,
except earnings per share data

2004

2005

2004

Gain on disposition ofavailable-for-sale securities

488,727

287,530

Gain on disposition of tangible assets

1,512

368

1,493

363

Rental revenue

2,304

2,574

2,274

2,541

535

22,535528

22,24658,727

1,431

57,9731,413

Equity income from affiliates (note 5)$

482,455

283,840

Recovery of impairment losses onavailable-for-sale securities (note 5)
Recovery of impairment losses onheld-to-maturity securities (note 5)
Others39,667-39,158-178,876

121,380

176,581

119,822770,348435,818

760,462

430,225

84,24879,527

83,16778,507

27,18525,353

26,83625,028Non-operating expenses:
Impairment losses on available-for-salesecurities (note 5)
Impairment losses on held-to-maturity
securities (note 5)
Impairment losses in investments inaffiliates (note 5)

850

-

839

-

6,136

1,202

6,057

1,187

6,708

6,523

6,622

6,439

-

362

-

357

42,010180,128

41,471

177,816

167,137

293,095

164,992

289,334

1,637,162

502,146

1,616,152

495,702

16,69017,675

16,476

17,4481,653,852

519,821

1,632,628

513,150(281,052)

20,771(277,445)

20,504

1,934,904

499,050

1,910,073

492,646

1,013(27,585)

1,000(27,231)

1,933,891

526,635$

1,909,073

519,877

Basic

2,973

790

$

2,935

780

Diluted

2,971

790

$

2,933

780

Basic

2,999

818

$

2,961

808

Diluted

2,997

818

$

2,959

808

Loss on disposition of tangible assets
Loss on disposition ofavailable-for-sale securities
Loss on investments in affiliates (note 5)
OthersOrdinary income
Extraordinary gains
Earnings before income taxes
Income taxes (note 24)
Net income before minority interest in income
Minority interest in income (losses) ofconsolidated subsidiaries
Net income
Ordinary earnings per share (note 25)

Earnings per share (note 25)

See accompanying notes to consolidated financial statements.

94(133,123)(3,581)(21,384)--(3,133)(1,378)
4,511
-

-

-

-

3,224,534

-

-

-

1,283

-

3,224,534

156,805-

3,194,625
29,909See accompanying notes to consolidated financial statements.

December 31, 2005

Consolidated net income
Changes from additionallyacquired equity of KEBD
Capital adjustment on investment
in subsidiaries(KEBD)
Gain (loss) on foreignexchange translations
Capital adjustment on investment
in subsidiaries(KEBC)
Increase in consolidated
capital adjustment
Deferred tax adjustment on
consolidated capital adjustment
Increase in minority interest equity
Others

December 31, 2004

January 1, 2004
Consolidated net income
Issuance of common stock
Effect of the change in capital ofequity-method investees
Changes from discontinuanceof equity method
Changes from discontinuanceof consolidation
Gain (loss) on foreignexchange translations
Capital adjustment on investment
in subsidiaries
Changes resulted from theacquisition of KEBCS
Increase in consolidated
capital adjustment
Decrease in minority interest equity
Additional loss of minority interest
OthersCapitalstock

1,358,864

286-(4,511)(3,490)--1,933,891(567,312)(28,509)
2,382(39,438)

12,256(3,793)---(1,036,845)
526,635-

1,098,558(534,241)-

1,345,793

-

43

-

-

-

286,963

323,669
-

1,140

9,128

255

-

81,373-(98,693)(29,909)

In millions of Won
Consolidated Consolidated Consolidated
capital retained earnings
capitalsurplus (accumulated deficit) adjustment

1,146

974
-

-

-

(631)

-

(7,581)-

8,384(29,379)
28,509----(17,574)--

26,828-

Minority
interest
equityTotal

5,683,102(534,241)
974
286

1,345,793-(5,456)(3,133)(7,581)

1,933,891

2,952,569

323,669(29,379)
2,382(38,298)-(7,119)(17,574)(51,750)

1,283

2,242,720
526,635-$ 3,183,153

-

-

-

-

-

-

-

$ 3,183,153

-

-

-

-

-

-

-

3,153,628
29,525

Capital
stock

-

-

-

4,453

(1,360)(3,093)

-

-

-

-

-

(21,110)(3,535)-(131,415)

1,267

154,793-

1,341,426

282-(4,453)(3,445)--

1,909,073(560,031)(28,143)
2,351(38,932)

12,099(3,744)---(1,023,539)
519,877-

1,084,460(527,385)-

1,328,523

-

42

-

-

-

283,280

319,515
-

1,125

9,011

252

-

80,329-(97,427)(29,525)

In thousands of U.S.Dollars
Consolidated Consolidated Consolidated
capital retained earnings
capitalsurplus (accumulated deficit) adjustment

1,131

962
-

-

-

(623)

-

(7,484)-

8,276(29,002)28,143----(17,349)--

26,484-

Minority
interest
equityTotal

5,610,170(527,385)
962
282

1,328,523-(5,386)(3,093)(7,484)

1,909,073

2,914,678

319,515(29,002)2,351(37,807)-(7,027)(17,349)(51,086)

1,267

2,213,939
519,877-

KOREA EXCHANGE BANK AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years ended December 31, 2005 and 2004

KOREA EXCHANGE BANK AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2005 and 2004

In millions of Won
2005

In thousands of U.S Dollars
2004

2005

94
95

2004

Cash flows from operating activities:
Net income

1,933,891

526,635(440)$

1,909,073

519,877(6,317)(434)(6,236)(482,019)(281,007)(475,833)(277,401)

25,521

78,09625,19377,094

Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Gain on valuation of trading securities, net
Gain on disposal of availablefor-sale securities, net
Impairment losses on availablefor-sale securities, net
Impairment losses (recovery of impairment
loss) on held-to-maturity securities, net(12,482)

25,353(12,322)

25,028Equity loss (earnings) from affiliates, net

315(22,173)311(21,888)

Gain on disposal of loans, net(9,110)(50,073)(8,993)(49,430)

Loss on disposal of tangible assets, net

4,624

834

4,565

823

(64,271)

80,501(63,446)

79,468

4,457

1,364

4,400

1,346

Loss (gain) on derivatives trading andforeign exchange, net
Deferred losses on foreign currencytranslation, net
Amortization of debt securities purchasedwith premiums, net(13,329)

26,371(13,158)

26,033

Provision for loan losses

43,3411,001,057

42,785988,210

Provision for other liabilities

122,276

77,687

120,70776,690Depreciation and amortization

115,240

121,879

113,761

120,315

Provision of retirement and severance benefit

60,942

55,99060,16055,271

21,647-

21,369

-

8,531

6,493

8,421

6,410

Provision of allowance for acceptancesand guarantees
Stock option compensation costs
Reversal of allowance for acceptancesand guarantees
Amortization of present value discounts
Minority interest in income (losses)-(35,088)-(34,638)(9,280)(13,825)(9,161)(13,648)

1,013(27,585)

1,000(27,231)

Gains from liabilities exempted(16,690)(16,175)(16,476)(15,967)

Gain from trading if bills, net(2,185)-(2,157)-(303,164)-(299,274)-

Income tax benefits
Changes in assets and liabilities:
Increase in trading securities(110,704)(703,723)(109,283)(694,692)

Decrease (increase) in accrued income(60,576)

182,578(59,799)

180,235

Decrease in prepaid expenses

31,817

4,688

31,4094,628

Decrease in accrued expenses(146,890)(18,516)(145,005)(18,278)

Increase (decrease) in unearned income

1,820(26,142)

1,797(25,807)

Payment of severance benefits(7,643)(41,933)(7,545)(41,395)

13

797

13

787

(41,477)(24,656)(40,945)(24,340)(1,221)-(1,205)-

1,093,967

923,110

1,079,928

911,264

Decrease in transfer to National Pension Fund
Increase in deposit of insurance
for severance and retirement
Exercise of stock options
Net cash provided by operating activities
See accompanying notes to consolidated financial statements.

$

KOREA EXCHANGE BANK AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Years ended December 31, 2005 and 2004

In millions of Won
2005

In thousands of U.S Dollars
2004

2005

2004

Cash flows from investing activities:
Decrease in available-for-sale securities

2,413,492

1,846,673

2,382,519

1,822,974

Increase in held-to-maturity securities(704,438)(625,378)(695,398)(617,352)

Decrease in equity securities
subject to equity method
Decrease (increase) in loans

27,016

233,668

26,669230,669(1,732,103)

943,045(1,709,874)

930,943

Purchase of fixed assets(145,889)(109,761)(144,196)(108,352)

Decrease (increase) in other assets

2,509,028(2,224,201)

2,477,009(2,195,657)

2,367,106

64,046

2,336,729

63,225Decrease in deposits(502,101)(4,295,300)(495,657)(4,240,178)

Proceeds from (repayment of) borrowings

606,061(696,713)

598,283(687,772)

Proceeds from (repayment of) debentures(587,953)

212,304(580,408)

209,580(2,482,070)

1,464,858(2,450,217)

1,446,059

-

(19)

-

(19)

(2,966,063)(3,314,870)(2,927,999)(3,272,330)-(30,291)-(29,902)495,010(2,358,005)

488,657(2,327,743)

2,798,561

5,156,566

2,762,647

5,090,391

3,293,571

2,798,561

3,251,304

2,762,648

Net cash provided byinvesting activities
Cash flows from financing activities:

Increase (decrease) in other liabilities
Payment of stock issuance costs
Net cash used infinancing activities
Decrease in cash due to change ofconsolidated subsidiaries
Net increase (decrease) in cash andcash equivalents
Cash and cash equivalents
at the beginning of the year
Cash and cash equivalents
at the end of the year (note 26)
See accompanying notes to consolidated financial statements.

96$

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

96
97(1) Organization and Description of Subsidiaries
The accompanying consolidated financial statements of Korea Exchange Bank (the “Bank”) and its consolidated subsidiaries including certain
trust accounts are prepared in accordance with accounting principles generally accepted in the Republic of Korea. General information of theBank, its consolidated subsidiaries, its non-consolidated subsidiaries and equity-method investees are described below.

(a) The Bank
The Bank was established on January 30, 1967 as a government-invested bank to engage in foreign exchange and the trade finance businessunder the Korea Exchange Bank Act. In December 1989, the Korea Exchange Bank Act was repealed and the Bank was converted into a
corporation under the Commercial Code of the Republic of Korea. In 1994, the Bank offered its shares for public ownership and all shares arelisted on the Korean Stock Exchange.
The Bank primarily provides commercial banking services, trust banking services, foreign exchange, merchant banking business through themerger with Korea International Merchant Bank (“KIMB”), a domestic subsidiary of the Bank, and other related operations as permitted underthe Bank Act and other relevant laws and regulations in the Republic of Korea.
The merger between the Bank and Korea Exchange Bank Credit Service Co., Ltd. (“KEBCS”) was finalized on February 28, 2004 (see note 29).
The Bank implemented a two-to-one capital reduction on all outstanding shares of common and preferred stock for the purpose of disposition of
accumulated deficit in accordance with a resolution of board of directors on November 10, 2000. In addition, on December 22, 2000, the Bank
increased its capital by issuing 122 million new shares of preferred stock at par value of 5,000 per share in accordance with a resolution ofboard of directors on November 10, 2000.
The Bank entered into a Memorandum of Understanding regarding the Share Subscription Agreement with Lone Star Fund IV on August 27, 2003.
On October 30, 2003, the Bank issued 268,750,000 shares of common stock to LSF-KEB Holdings, SCA at 4,000 per share (at less than its parvalue) in accordance with a resolution during an extraordinary shareholders’ meeting on September 16, 2003. The amount that was less than thepar value was recognized as a discount on stock issued.
In addition, LSF-KEB Holdings, SCA acquired 26,235,923 shares of common stock and 30,865,792 shares of preferred stock from Commerz Bankand Export-Import Bank of Korea, respectively, at 5,400 per share on October 30, 2003. Also, 122 million shares and 26 million shares ofpreferred stock were converted to common stock on December 22, 2003 and April 22, 2004, respectively.
In addition, the Bank issued 5,981,895 shares of common stock of the Bank to the shareholders listed in the shareholders’ list of KEBCS as ofFebruary 28, 2004 according to the merger agreement.
As of December 31, 2005, the total number of authorized stock of the Bank is 1,000 million (par value 5,000) while the paid-in capital amounts to3,224,534 million (with 644,907 thousand shares of common stock outstanding with par value of 5,000).
The Bank’s shareholders as of December 31, 2005 and 2004 are as follows:
Number of shares owned

Ownership (%)

LSF-KEB Holdings, SCA

325,851,715

50.53

Commerzbank AG

94,247,389

14.61

Export-Import Bank of Korea

89,448,595

13.87

Bank of Korea

39,500,000

6.12

Others

95,859,127

14.87

644,906,826

100.00

LSF-KEB Holdings, SCA has a right to acquire 41,764,077 shares and 49,134,208 shares of KEB from Commerzbank and Export-Import Bank of
Korea, respectively, through exercising call options by October 31, 2006. LSF-KEB Holdings, SCA is in the process of sales of its stake in KEB as
of December 31, 2005.
As of December 31, 2005, the Bank has 335 branches, agencies and offices in total over both domestic and overseas market. The Bank closed 8
domestic branches while opening 10 domestic branches during 2005.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(b) Domestic Subsidiaries
KEB Capital Co., Ltd. (“KEBC”)
KEBC was incorporated on September 11, 1989 to engage in leasing industrial equipment and registered in Korea Securities Dealers AutomatedQuotation (“KOSDAQ”) on January 15, 1995.
As KEBC continued to experience negative capital until March 31, 2001, its registration with KOSDAQ was canceled by KOSDAQ Committee on
July 11, 2001 and withdrawn from KOSDAQ market on August 24, 2001. As of December 31, 2005, 99.3% of the total shares of KEBC are owned by
the Bank.
KEBC implemented a 14-to-1 capital reduction on the shares owned by the Bank and reduced its capital by means of a 7-to-1 capital reduction,
or execution of stock selling option with 800 per share on the shares owned by other individual shareholders and the employee stock ownershipassociation as of November 9, 2001, for the purpose of debt restructuring due to the work-out process, based on the resolution of shareholders’meeting on October 13, 2001. This capital reduction resulted in a gain on capital reduction of 34,725 million which was used to recover negative
capital.
In addition, on November 9, 2001, KEBC issued 14,805 thousand shares of common stock for cash at par value to the Bank, in accordance withthe resolution of the board of directors on October 26, 2001. The proceeds of the new stock issuance were used for the repayment of borrowings
amounting to 74,024 million from the Bank. As of December 31, 2005, the total paid-in-capital amounts to 75,400 million.

(c) Overseas Subsidiaries
KEB Futures Co., Ltd. (“KEBFC”)
KEBFC was incorporated on September 24, 1997 as the integrated futures brokerage of the Bank. In 1998, KEBFC was granted a futures trading
license for overseas markets and domestic operations from the Ministry of Economy and Finance. As of December 31, 2005, the total paid-incapital amounts to 15,000 million.

KEB Australia Ltd. (“KEBA”)
KEBA was established in Sydney, Australia on July 6, 1986 to provide financial services to Korean companies and residents in Sydney and thesurrounding area. The Bank retains 100% equity ownership as of December 31, 2005, and the total paid-in-capital of KEBA amounts to
AUD55,000 thousand.

Korea Exchange Bank of Canada (“KEBOC”)
KEBOC was established in Toronto in Canada on October 6, 1981 to provide financial services to Korean companies and residents in Toronto andthe surrounding area. The Bank retains 100% equity ownership as of December 31, 2005, and the total paid-in-capital of KEBOC amounts to
CAD33.4 million.

P.T. Korea Exchange Bank Danamon (“KEBD”)
KEBD was established in Jakarta in Indonesia on November 5, 1990 to provide financial services to Korean companies and residents in Jakarta
and the surrounding area. The Bank additionally acquired shares of KEBD at 10,715 million in 2005. The Bank retains 99% equity ownership asof December 31, 2005, and the total paid-in-capital of KEBD amounts to IDR150,000 million.

Korea Exchange Bank Deutschland AG (“KEBDAG”)
KEBDAG was established in Frankfurt in Germany on December 29, 1992 to provide financial services to Korean companies and residents in
Frankfurt and the surrounding area. The Bank retains 100% equity ownership as of December 31, 2005, and the total paid-in-capital of KEBDAG
amounts to EUR15,339 thousand.

KEB NY Financial Corp. (“NYF”)
NYF was established in New York in the U.S.A. on April 8, 2004 to provide financial services to Korean companies and residents in New York andthe surrounding area. The Bank retains 100% equity ownership as of December 31, 2005, and the total paid-in-capital of NYF amounts to US$1.

KEB LA Financial Corp. (“LAF”)

98

LAF was established in Los Angeles in the U.S.A. on April 8, 2004 to provide financial services to Korean companies and residents in Los Angeles
and the surrounding area. The Bank retains 100% equity ownership as of December 31, 2005, and the total paid-in-capital of LAF amounts to
US$1.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

9899(d) Equity Method Investees
KEB Commerz Investment Trust Management Co., Ltd. (“KEBIT”)
KEBIT was established on April 6, 1988 to provide investment consulting and information services under the name, Korea Securities Investment
Management Co., Ltd., which was changed to KEB Investment Management Co., Ltd. on September 16, 1992, and to KEB Investment TrustManagement Co., Ltd. on July 8, 1997, and finally to KEB Commerz Investment Trust Management Co., Ltd. on May 28, 1999. As of December 31,
2004, the total paid-in-capital amounts to 30,000 million. On February 18, 2005, the Bank sold 2,760,000 shares of KEBIT to Landmark
Investment Trust Management Co., Ltd. for 28,043 million. The Bank recorded a gain on disposition of available-for-sale securities amountingof 11,275 million for the year ended December 31, 2005 .

Cairo Far East Bank S.A.E. (“CFEB”)
CFEB was established on October 1, 1978 to engage in general financial business. The Bank has 31.5% equity ownership of CFEB as ofDecember 31, 2005 and total paid-in-capital of CFEB amounts to EGP62,540 thousand.

KEB USA Int'l Corp. (“USAI”)
USAI was established in New York in the U.S.A. on May 3, 2004 for the purpose of remitting US dollars of the bank to U.S.A or the third countries.
The Bank retains 100% equity ownership as of December 31, 2005, and the total paid-in-capital of USAI amounts to US$1.

(e) Condensed Financial Statements of Significant Subsidiaries
Condensed financial statements of significant subsidiaries as of December 31, 2005 and for the year then ended are as follows:(In millions of Won)
KEBOC

KEBDAG

KEBD

KEBC

Others

Total

Balance sheets:
Assets:Cash and deposits
Securities
Loans
Fixed assets
Other assts

32,770494,871
1,501
2,834

128,183
12,580
197,579
118
5,127

6,820
60,232
170,180
215
6,458

498
1,882
135,059
34,79010,80889,280722,328
605,686
2,626
20,138257,551
797,022
1,603,375
39,25045,365

Total assets

531,976

343,587

243,905

183,037

1,440,058

2,742,563

Liabilities and shareholders’ equity:
Deposits
Borrowings
Debentures
Other liabilities

437,491
32,2494,010

104,295
171,576
25,9182,201

98,256
77,9148,130

70,62532,533

1,014,519
246,250
22,30335,726

1,654,561
598,614
48,22182,600Total liabilities

473,750

303,990

184,300

103,158

1,318,798

2,383,996

Capital stock
Capital surplus
Retained earnings (deficit)
Capital adjustments

29,06329,163-

18,396
3,066
18,135-

15,46544,140-75,4005,383(904)

70,39040,52010,350-208,71443,586
107,171(904)

Total shareholders’ equity

58,226

39,59759,60579,879121,260

358,567

Total liabilities andshareholders’ equity

531,976

343,587

243,905

183,037

1,440,058

2,742,563

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(In millions of Won)
KEBOC
Statement of income:Operating revenue
Operating expenses
Operating income
Non-operating income
Non-operating expenses
Ordinary income
Extraordinary income
Extraordinary loss
Net income
before income tax
Income tax (Income tax benefits)
Net income

KEBDAG

KEBD

KEBC

OthersTotal

28,242
17,561
10,68126
13
10,694-32,92525,842
7,083
366
2,888
4,561
-

23,353
7,681
15,67220
370
15,322-

41,37931,697
9,682
14,843
5,909
18,616-

154,005
128,210
25,795216
10,656
15,355-279,904
210,991
68,913
15,471
19,83664,548-

10,694
3,529

4,561
1,776

15,322
4,397

18,616(1,399)15,355
4,847

64,54813,150

7,165

2,785

10,92520,015

10,50851,398

Above condensed balance sheets and statements of income are based on the consolidated subsidiaries’ financial statements before consolidation
adjustments. Also, amount which is presented as “others” totals data of financial statements of consolidated KEBF, guaranteed trust accounts
and other foreign consolidated subsidiaries.

(2) Scope of Consolidation and Accounting Using the Equity Method
The consolidated financial statements include the bank accounts and the trust accounts of the Bank and its wholly or partially owned
subsidiaries. Certain trust accounts whose principal is not guaranteed by the Bank are excluded from the consolidated financial statements inaccordance with the accounting guidelines of the Financial Supervisory Commission (“FSC”).
Subsidiaries of the Bank as of December 31, 2005 and 2004 are as follows:(a) Subsidiaries Included in the Consolidated Financial Statements
No. of shares held (In thousands)
2005
2004
Domestic:
KEB Capital Co., Ltd. (“KEBC”)KEB Futures Co., Ltd. (“KEBFC”)

14,9763,000

14,976
3,000

99.3
100.0

99.3
100.0

Foreign:
Korea Exchange Bank of Canada (“KEBOC”)
KEB Australia Ltd. (“KEBA”)
KEB Deutscheland AG (“KEBDAG”)
P.T. KEB Danamon (“KEBD”) (*1)
Banco KEB do Brazil S.A. (“KEBB”)
KEB NY Financial Corp. (“NYF”)
KEB LA Financial Corp. (“LAF”)

334
55,00020
133,7260.1
0.1

334
55,00020
133,726
0.1
0.1

100.0
100.0
100.0
99.0
100.0
100.0
100.0

100.0
100.0
100.0
85.0
100.0
100.0
100.0

(*1) The Bank additionally acquired shares of KEBD of100

Ownership (%)
2005
2004

10,715 million in 2005.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

100
101(b) Subsidiaries Using Equity Accounting Method
Cairo Far East Bank S.A.E.("CFEB") and KEB USA International Corp. (“USAI”) which the Bank owns 832,000 shares (31.5%) and 100 shares(100.0%), respectively, were accounted for using the equity method of accounting in accordance with the Bank Act and other related standards.
Meta Payment & Trust and KEB Fund Investor Service (“KEBFIS”), which the Bank owns 170,000 shares (38.1%) and 510,000 shares (100.0%),
respectively, were excluded from consolidation since the asset values were less than 7 billion and excluded from using equity method
accounting since there is no significant changes from applying equity method.
The Bank sold four million shares (out of 16.4 million shares) of Doosan Heavy Industries & Construction Co., Ltd. at 49,566 million on
December 17, 2004. As its ownership declined to 11.9%, the remaining 12.4 million shares with book value of 198,173 million were excluded
from the application of the equity method and reclassified into available-for-sale securities.
The Bank sold 12.4 million shares of the aforementioned company for 215,085 million in 2005. For year ended December 31, 2005, the Bank
recorded a gain on disposition of available-for-sale securities amounting to 63,275 million which is classified as non-operating income.

(3) Summary of Significant Accounting Policies
The significant accounting policies followed by the Bank in the preparation of its accompanying consolidated financial statements are
summarized as follows:(a) Basis of Presenting Consolidated Financial Statements
The Bank maintains its accounting records in Korean Won and prepares statutory financial statements in the Korean language (Hangul) inconformity with accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Bank that
conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted
accounting principles in other countries. Accordingly, these consolidated financial statements are intended for use by those who are informed
about Korean accounting principles and practices. The accompanying consolidated financial statements have been condensed, restructured andtranslated into English from the Korean language consolidated financial statements.
Certain information included in the Korean language financial statements, but not required for a fair presentation of the Bank’s financial position,
results of operations or cash flows, is not presented in the accompanying consolidated financial statements.
Effective January 1, 2005, the Bank adopted Statements of Korea Accounting Standards (“SKAS”) No. 15 “Investments in Associates”, No. 16“Income Taxes”, No. 17 “Provisions, Contingent Liabilities and Contingent Assets”. As allowed by these standards, prior year balances were notreclassified to conform to the current year presentation.
According to the revision of the Regulation on Supervision of Banking Business, the Bank additionally accrued allowance for estimated potential
losses on unconfirmed guarantees and acceptances, endorsed notes, and confirmed guarantees and acceptances with credit classifications ofnormal and precautionary. Also the Bank accrued allowance for estimated potential losses on unused loan commitments with credit
classification of normal as of December 31, 2005. As allowed by this regulation, prior year balances were not reclassified to conform to thecurrent year presentation.
Regarding the overseas branches and subsidiaries, the Bank used their financial statements that are prepared in accordance with the financial
accounting standards generally accepted in their locations, except for the cases that have material effect on the Bank’s financial statements, due
to difference of standards in various countries.
The fiscal year-end dates of most subsidiaries accord with that of the Bank, except for KEBC and KEBFC. Financial statements for the twelvemonth period ended December 31, 2005 were used for consolidation of these two subsidiaries with fiscal year end on March 31.
Certain accounts of prior year’s financial statements, presented herein for comparative purposes, were reclassified to conform to the current
year’s presentation. These reclassifications did not result in any change to reported net income or shareholders’ equity.

(b) Basis of Translating Financial Statements
The financial statements as of and for the years ended December 31, 2005 and 2004, are expressed in Korean Won and solely for the convenienceof the reader, have been translated into U.S. dollars at the rate of 1,013.0 to US$1, the basic exchange rate on December 31, 2005. Thesetranslations should not be construed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any
other rate.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(c) Off-set of Investment Account and Capital AccountIf the Bank’s investment account is greater than the corresponding capital account of subsidiaries, such excess is amortized over five years using
the straight-line method from the date of the acquisition of the investment. If the Bank’s investment account is smaller than the corresponding
capital account of subsidiaries, then the portion of the difference caused by the subsidiaries’ amortizable non-currency assets is reversed over
the weighted-average useful lives of such assets using the straight-line method, and the remaining resulted from the subsidiaries’ unamortizable
assets is reversed at the point when expensed. If the difference between the Bank’s acquisition cost over its share in the subsidiaries’ net asset
value is due to the investee’s specific assets and liabilities which are evaluated using their fair market values, such difference is accounted forusing those subsidiaries’ accounting treatments applied for such assets and liabilities.
All significant intercompany transactions and balances among the consolidated companies have been eliminated in consolidation.

(d) Recognition of Interest Income
Interest income on due from banks, loans and investments is recognized on an accrual basis, while interest income on overdue and defaulted
loans, not secured by guarantees from financial institutions or collateral deposits, is recognized on a cash basis. As of December 31, 2005 and2004, the amount of interest not recognized due to such policy approximates 66,885 million and 156,037 million, respectively.
All additional gains during the process of handling loans are deferred and recorded as deduction from the loan amount. Additional expenses withthe future economic profits, which can be classified by individual loans, are also deferred and expressed as addition to the loan amount. Suchgains and expenses are reversed or amortized using effective interest rates and expressed as addition to or deduction from the interest income.

(e) Allowance for Loan Losses
The Bank applied the Forward Looking Criteria (“FLC”) for its loan classification based on the credit rating to determine allowances for loan
losses. Under this method, the borrowers’ future debt repayment capacity as well as their overall financial health and management soundness is
considered in developing the reserve for possible loan losses related to large corporate customers.
However, loan classification for the smaller corporate, retail loan customers and credit card accounts are classified based on the delinquency
period, value of collateral and bankruptcy status only.
Estimated loan losses as of as of December 31, 2005 and 2004 were determined by applying over the following minimum percentages to eachcredit risk classification:

Classification

Corporate loans

Retail loans

Credit card loans and receivables

Normal

0.5%

0.75%

1.0%

Precautionary

2.0%

8.0%

12.0%

Substandard

20.0%

20.0%

20.0%

Doubtful

50.0%

55.0%

60.0%

Estimated loss

100.0%

100.0%

100.0%

Until 2004, the Bank had accrued allowance for estimated potential losses on confirmed guarantees and acceptances with credit classifications of
substandard, doubtful and estimated loss. From 2005, according to the revised of Regulation on Supervision of Banking Business, the Bank
established allowance for estimated losses on unconfirmed guarantees and acceptances and endorsed notes as well as confirmed guarantees
and acceptances considering the credit conversion factor based on the new standard of Bank for International Settlements Accord by applying thesame methodology that was used to determine the allowance for loan losses.
Also, the Bank had accrued allowance for estimated potential losses on unused limit of cash advance of credit card that have been used at least
once in recent one year. However, from 2005, the Bank accrued allowance for estimated potential losses on total unused limit of credit card
including unused limit of cash advance with credit classification of normal. Additionally the Bank accrued allowance for estimated potential
losses on unused loan commitments for corporate and retail loan customers considering the credit conversion factor based on the new standard
of Bank for International Settlements Accord by applying the same methodology that was used to determine the allowance for loan losses.

102

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

102
103
Subsidiaries of the Bank also apply similar accounting treatments and the criteria for loan classification and the provision of allowance as the
Bank based on the borrowers’ future debt repayment capacity and the historical delinquency rates.

(f) Securities
Upon acquisition, the Bank classifies certain debt and equity securities into one of the three categories of held-to-maturity, available-for-sale, ortrading securities and such determination should be reassessed at each balance sheet date. Investments in debt securities that the Bank has the
positive intent and ability to hold to maturity are classified as held-to-maturity. Securities that are bought and held principally for the purpose of
selling them in the near term (thus held for only a short period of time) are classified as trading securities. Trading generally reflects active andfrequent buying and selling, and trading securities are generally used to generate profit on short-term differences in price. Investments notclassified as either held-to-maturity or trading securities are classified as available-for-sale securities.
The securities are initially carried at cost, including incidental expenses, determined by using the specific-identification method or movingaverage method.
Trading securities are carried at fair value, with unrealized holding gains and losses included in income. Available-for-sale securities are carriedat fair value, with unrealized holding gains and losses reported as a capital adjustment. Investments in equity securities that do not have readily
determinable fair values are stated at cost. Declines in value judged to be other-than-temporary on available-for-sale securities are charged tocurrent results of operations. Investments in debt securities that are classified into held-to-maturity are reported at amortized cost at thebalance sheet date and such amortization is included in interest income.
Marketable securities are at the quoted market prices as of the period end. Non-marketable debt securities are recorded at the fair values
derived from the discounted cash flows by using an interest rate deemed to approximate the market interest rate. The market interest rate isdetermined by the issuers’ credit rate announced by the accredited credit rating agencies in Korea. Money market funds are recorded at the fairvalue determined by the investment management companies.
Impairment losses are recognized in current operations when the recoverable amounts are less than the acquisition cost of equity securities oramortized cost of debt securities. Recognition of unrealized gains and losses is summarized as follows:

Classification
Trading
Available-for-sale:
Debt securities andmarketable equity securities
Non-marketable equity
securities
Held-to-maturity
Investments in affiliates

Valuation method
Fair value
Fair value

Cost
Cost
EquityRecognition of unrealized gains and losses
Current operations
Capital adjustment (except for impairment losses,
which is recognized in current operations)
Impairment losses to net income
Amortized cost
Current operations, retained earnings(accumulated deficit), or capitaladjustments, depending on the source of the gains or losses

On January 1, 2005, the Bank changed its presentation manner to reflect valuation of assets included in its private placement fund to the balance
sheet by classifying it into private placement fund presented as beneficiary certificate, which was previously classified into each fund per their
purpose. Such change in presentation method was retroactively applied to the prior year balance sheet with no effect to the net asset value,
ordinary income and net income.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(g) Investment Securities under the Equity Method of Accounting
Investments in affiliated companies of which the Bank owns 15% or more of the voting stock or over which the Bank has significant management
control are stated at an amount as determined using the equity method. The Bank’s share in net income or net loss of the investees is reflectedin current operations. Changes in the retained earnings, capital surplus or other capital accounts of the investees are accounted for as an
adjustment to retained earnings or to capital adjustments.
Under the equity method of accounting, the Bank does not record its share of losses of affiliate companies when such losses would make theBank’s investment in such entity less than zero.
But, the Bank holds other assets such as preferred stock or loans for investee the Bank’s share of loss of investee remains recorded until such
assets are reduced to nil.
Any excess in the Bank’s acquisition cost over its share in the investee’s identifiable net assets is considered as goodwill and amortized using thestraight-line method over five years of estimated useful life. The amortization of such goodwill is recorded against the equity income (losses) ofaffiliates. When events or circumstances indicate that carrying amount may not be recoverable, the Bank reviews goodwill for any impairment.
If the Bank’s acquisition cost is less than its share in the investee’s net asset value, then the portion of difference caused by the investee’samortizable non-currency assets is reversed over the weighted average useful lives of such assets using the straight-line method, and theremaining resulted from the investee’s unamortizable assets is reversed at the point when expensed. If the difference between the Bank’s
acquisition cost over its share in the investee’s net asset value is resulted due to the specific assets and liabilities which are evaluated using theirfair market values, such difference is accounted for using the investee’s accounting treatments applied for such assets and liabilities.
Prior to January 1, 2005, upon the sale to investee, the Bank fully eliminates the unrealized gain, whereas in the sale to the Bank, the Bank
proportionately eliminates the unrealized gain based on its percentage of ownership. Effective from January 1, 2005, the Bank adopted SKAS No.
15 “Investments in Associates”. In accordance with this standard, gains and losses recorded between the Bank and the investee from thetransactions are proportionately eliminated, based on the Bank’s percentage of ownership over the investee.

(h) Tangible Assets
Tangible assets are recorded at cost, except for those revalued under the Asset Revaluation Law, which are stated at the revalued amounts (seenote 15). Depreciation is computed using the declining-balance method over the estimated useful lives of the related assets, except for buildings
and leasehold improvements for which depreciation is computed using the straight-line method.
The estimated useful lives of premises and equipment are as follows:
Estimated useful lives
Buildings
Equipment
Leasehold improvements

25~40 years
4~5 years
5~10 years

Routine maintenance and repairs are charged to current operations as incurred. Betterments and renewals enhancing the value or extending
the useful lives of the facilities are capitalized.

(i) Intangible Assets
Intangible asset consist of primarily of software development costs related to the office automation and productivity enhancement. The Bank
capitalized 60,844 million and 26,409 million in 2005 and 2004, respectively while amortized
18,642 million and 8,403 million in 2005 and2004, respectively.

(j) Foreclosed Assets
Foreclosed assets acquired through, or in lieu of, loan foreclosure which are to be sold are initially recorded at their fair value at the date offoreclosure. After foreclosure, the asset is carried at the lower of its carrying amount or fair value determined by its estimated public auction
price.
When the Bank disposes of foreclosed assets in installment sales, in conformity with accounting standard for the Korean Banking Industry, theproceeds and the sale gain/loss are recognized as receivable – disposition of asset and gain/loss – disposition of asset, respectively.

104

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

104105(k) Discounts on Debentures
Discounts on debentures, including debenture issuance costs, are amortized over the term of the debenture using the effective interest rate
method. Such amortization is included in interest expense.

(l) Retirement and Severance Benefits
Employees and executives who have been with the Bank and domestic subsidiaries for more than one year are entitled to lump-sum payment
based on the current rate of pay and the length of service when they leave the Bank and domestic subsidiaries. Retirement and severance
benefits of 177,037 million and 124,005 million represent the amount, which would be payable assuming all eligible employees andexecutives were to terminate their employment on December 31, 2005 and 2004, respectively. The Bank and subsidiaries’ actual payments ofseverance benefits were 7,643 million and 41,933 million in 2005 and 2004, respectively.
As for 73.5% of the severance benefit provision as of December 31, 2005, the Bank and domestic subsidiaries are under coverage by the employee
retirement insurance policies purchased from insurance companies including Samsung Life Insurance Co., Ltd. in which the employees are thebeneficiaries as well as the Retirement Trust provided by Chohung Bank and other financial institutions.
Through March 1999, under the National Pension Scheme of Korea, the Bank and subsidiaries transferred a certain portion of retirement
allowances of employees to the National Pension Fund. The amount transferred will reduce the retirement and severance benefit amount to bepayable to the employees when they leave the Bank and subsidiaries and is accordingly reflected in the accompanying consolidated financial
statements as a reduction from the retirement and severance benefit liability. Since April 1999, however, a new regulation applies and suchtransfers to the National Pension Fund are no longer required.

(m) Restructuring of Troubled Loans
Troubled loans restructured under work-out plans or other similar restructuring agreements are stated at present value, and the difference
between the nominal amount and present value is accounted for as the allowance for loan losses to the extent available. The remaining
difference is recorded as provision for loan losses. Amortization of these discounts is included in other interest income. Allowance for loan
losses for loans adjusted by above method is calculated based on the nominal amount, net of present value discount.

(n) Discounts on Capital Stock
Discounts on capital stock arising from the payment of stock issuance costs are reported as capital adjustments in shareholders’ equity andamortized within three years through appropriations of retained earnings.

(o) Income Taxes
Income tax on the earnings or loss for the year comprises current and deferred tax. Income tax is recognized in the statement of earnings except
to the extent that it relates to items recognized directly to equity, in which case it is recognized in equity.
Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the
expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted at the balance sheet date.
A deferred tax asset is recognized only to the extent that it is probable that future taxable earnings will be available against which the unused tax
losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be
realized.

(p) Securities Bought or Sold under Agreements to Resell or Repurchase
Securities bought or sold under resale or repurchase agreements are accounted for as loans or borrowings, respectively. Related income andexpenses are recorded as interest on loans and interest on borrowings, respectively.

(q) Foreign Currency Translation
Foreign currency denominated assets and liabilities are translated into Korean Won at the basic rates in effect at the balance sheet date.
Resulting exchange gains and losses are recognized currently and included in gains or losses on foreign exchange transactions. The financial
statements of overseas branches and offices are translated into Korean Won at the basic rates in effect at the balances sheet dates in accordancewith the financial accounting standards. The exchange rate used to translate U.S. Dollar into Korean Won at December 31, 2005 was
1,013.0:US$1.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(r) Stock Options
The stock option program allows the Bank’s employees to acquire shares of the Bank. The option exercise price is generally fixed at below themarket price of underlying shares at the date of the grant. The Bank values equity-settled stock options based upon an option pricing model
under the minimum value method (under the fair value as for the stock options granted after December 31, 2003) and recognizes this value as an
expense and capital adjustment over the period in which the options vest. When the options are exercised, equity is increased by the amount of
the proceeds received which is equal to the exercise price. However, compensation cost for cash-settled stock options shall be measured eachperiod based on the current stock price and is recognized as an expense and a liability over the service period.
In accordance with the agreement of the board of directors of the Bank, stock options were granted to the executives and the employees of theBank. All stock options granted prior to December 31, 2003, were accounted for using minimum value method using the Black-Scholes model.
Effective on January 1, 2004, the Bank is required to use fair value method using the Black-Scholes model for all new stock options granted after
December 31, 2003 in accordance with Korea Accounting Institute Interpretation 39-35. However, old options granted prior to December 31, 2003
are still allowed to be accounted for using minimum value method using the Black-Scholes model.

(s) Derivatives
Derivative instruments are classified as used for trading activities or for hedging activities according to their transaction purpose. All derivative
instruments are accounted for at fair value with the valuation gain or loss recorded as an asset or liability. Gain or loss from valuation of trading
derivative instruments is reflected in current operations. Fair value hedge accounting and cash flow hedge accounting are applied to thederivative instruments designed to hedge risks meeting certain conditions.
Fair value hedge accounting is applied to a derivative instrument designated as hedging the exposure to changes in the fair value of an asset or aliability or a firm commitment (hedged item) that is attributable to a particular risk. The gain or loss both on the hedging derivative instruments
and on the hedged item attributable to the hedged risk is reflected in current operations. Cash flow hedge accounting is applied to a derivative
instrument designated as hedging the exposure to variability in expected future cash flows of an asset or a liability or a forecasted transactionthat is attributable to a particular risk. The effective portion of gain or loss on a derivative instrument designated as a cash flow hedge is recorded
as a capital adjustment and the ineffective portion is recorded in current operations. The effective portion of gain or loss recorded as a capitaladjustment is reclassified to current earnings in the same period during which the hedged forecasted transaction affects earnings, or is added toor deducted from the book values of the related assets or liabilities at the time when the hedged forecasted transaction actually incurs.

(t) Merchant Banking AccountAs permitted by the Restructuring of Financial Institutions Act, the Bank may continue its merchant banking operations, including leasing
business, until the existing contracts acquired from Korea International Merchant Bank upon merger are terminated. Significant accounting
policies applied to the Bank’s merchant banking operations are summarized as follows:- Revenue Recognition on Discounted Notes
Interest income on discounted notes is accrued over the term of the notes. Income from the sale of discounted notes is recognized at the dateof sale based on the difference between the purchase and sales prices of the notes, adjusted for interest earned during the holding period.
- Cash Management Accounts (“CMA”)
The Bank recognizes interest income from CMA investments and interest expense from CMA deposits as other income and other expenses,
respectively.
- Lease transactions
The Bank and KEBC, a domestic subsidiary, accounts for lease transactions as operating or financing leases, depending upon the terms of thelease contracts. In general, non-cancelable leases are recognized as financing leases when ownership transfers at expiration of the leaseterm, when a bargain purchase option exists, or when the lease term exceeds the estimated economic life of the related asset.
Under the financing lease method, aggregate lease rentals are recorded as financing leases receivable, net of unearned interest, based on theexcess of rental revenue over the cost of the related assets. Unearned interest is recognized as interest income on financing leases using theeffective interest method over the lease term.

- Lease transactions, Continued
The Bank capitalized interest costs on debt borrowed to finance the purchase of lease assets as part of the cost of such assets prior to theassets being ready for lease.
Operating lease equipment is stated at cost and depreciated over the lease term. Operating lease income is recognized as operating income onan accrual basis over the lease term.
106

Foreign currency translation gains or losses incurred from foreign currency borrowings used to finance purchases of operating leaseequipment have been deferred and amortized over the period that the related lease rental revenues are recognized.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

106107(u) Accounting for Trust Accounts
The Bank has engaged in investment trust operations, which includes unrestricted money trusts, household money trusts and developmentmoney trusts and other trusts in accordance with Article 3 of the Trust Business Act. Financial statements for Trust Accounts were prepared inaccordance with the Trust Business Act, Regulation on Supervision of Trust Business, Articles of Regulation on Supervision of Trust Business andAccounting Standards for Trust Business, and items not stipulated are regulated by Accounting Standards for the Banking Industry or Appendices
4 and 5 in the Articles of Accounting Standards for the Banking Industry. Trust Accounts are separately accounted for from the Bank Accounts inaccordance with the related laws and regulations. Trusts and securities investment trusts in which principals and profits are not guaranteed are
excluded from the consolidated financial statements.
The significant accounting policies in the consolidation of the Trust Accounts are summarized as follows:- Revenues and Expenses of Trust Accounts
The trust accounts record the amount of the trust revenue less all expenses and trust fees as the dividends of trust profits to beneficiaries(including the guaranteed principal and minimum rate of return). The trust fees are recorded in the Bank’s accounts as a part of otheroperating income.
- Interest Income Recognition
Interest income on loans and investment securities held by the consolidated trust accounts are recognized using the same method as thebanking accounts of the Bank, while interest income on overdue and dishonored loans not secured by guarantees from financial institutions ordeposit collateral, is recognized on a cash basis.
- Securities
Pursuant to the laws and regulations applicable to trust operations prescribed by the banking regulatory authorities, equity securities andbeneficiary certificates held by the Bank’s consolidated trust accounts are stated at market or net asset value. Certain debt securities including
corporate debentures, except for debt securities included in the consolidated trust accounts established subsequent to November 15, 1998,
which are stated at market or net asset value, are stated at cost as permitted by the Trust Business Act and relevant related regulations.
- Securities, Continued
The securities in the trust accounts, which are consolidated, are valued by the closing stock price as of the balance sheet date, if no closing
price exists as of that date the nearest closing price to the date is used, retroactively.
Under Korean Stock Exchange Act 2, article 14, unlisted stock with market price formed under KOSDAQ, is valued by the method used for listed
stock, unlisted stock without market price will be valued under cost method.
In addition, if the stock does not yet have a market price due to ex-rights, ex-dividend, decrease in capital or M&A it will be valued according to
Financial Supervisory Service at its book value until a market price is formed.
Other than debt securities in performance yield trusts or unspecified money trusts which guarantee principal at a minimum rate of return, all
the debt securities in the trust which have a formed market price in the exchange market for at least 10 days for each preceding 3 months fromthe valuation date, are valued at the closing market price on the valuation date. However, for listed and unlisted debt securities which have nomarket price as of the valuation date, the interest rates announced daily by Korean Securities Dealer Association, and incremental interest rate
relating to illiquidity risk can be considered in computing the adjusted rate of return for valuation of debt securities. Furthermore, undertransition clause in the accounting and reporting guidelines prescribed by the trust regulatory authorities, when market value does not exist or
does not reflect fair value, securities are valued by computation of fair value provided by the Market Value Appraisal Committee, which ismanaged by the trust company established by the Bank.

- Loans to Bank Accounts
The Bank’s consolidated trust accounts deposit certain amounts for drawing of unspecified money trust, and account for them as deposits at
the Bank’s banking accounts. Interest on these deposits is computed and recorded daily. These deposits at the Bank and their interests are
eliminated in consolidation.
- Special Reserve
Certain consolidated money trust agreements provide that the Bank guarantees a minimum rate of return. In relation to such guarantees, theBank is required to set up a minimum 25% of trust fees as a special allowance, until the total allowance equals 5% of the related money trustbalance. If the current income from trust operations is insufficient to generate the required rate of return, the deficiency may be either
recovered from previously established special allowances or from the Bank’s banking business operations.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

- Allowance for Loan Losses
Allowance for loan losses of consolidated trust account assets which are not carried at market value (including loans, commercial paper andcertain corporate debentures) are provided based on a credit risk classification of the loan portfolio as of December 31. Estimated loan losses
are determined using the same estimated loss percentage for each credit risk classification as the banking accounts of the Bank.
Estimated loan losses as of December 31, 2005 and 2004 were determined by applying over the following minimum percentages to each credit
risk classification:
Classification

Trust Account Assets

Retail loans

Normal0.5%Precautionary

2.0%

0.75%
8.0%

Substandard

20.0%

20.0%

Doubtful

50.0%

55.0%

Estimated loss

100.0%

100.0%

The allowance for loan losses of consolidated trust accounts with a guaranteed minimum rate of return at December 31, 2005 and 2004
amounts to 6,357 million and 5,696 million, respectively, and the charge-offs recorded by the trust accounts of the Bank in 2005 and 2004
amount to 53,182 million and 272,976 million, respectively.

- Trust Fees
The Bank receives trust fees, ranging from 0.2% to 2.0% of the trust’s principal, from the trust accounts as compensation for its management oftrust assets and operations. The Bank is also entitled to receive special trust fees from certain trust accounts with a guaranteed minimum rateof return in accordance with the relevant laws and regulations applicable to trust operations.
- Compensation to the Trust Accounts
The Bank compensates for losses incurred in certain consolidated trust accounts subject to minimum return guarantees. Such compensations
are accounted for as compensation for trust accounts of the banking accounts and other income of the trust accounts, respectively, in
accordance with the relevant laws and regulations applicable to trust operations.
There are no compensations accounted for as other income of the consolidated trust accounts for the years ended December 31, 2005 and2004.

(v) Cash Equivalents
The Bank and subsidiaries consider short-term financial instruments with maturities of three months or less at the acquisition date to be cash
equivalents.

(w) Contingent Liabilities
Contingent losses are generally recognized as a liability when probable and reasonably estimable. Effective January 1, 2005, the Bank adopted
SKAS No. 17 ““Provisions, Contingent Liabilities and Contingent Assets”. This new standard is consistent with the Bank’s previous policy.

108

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

108
109

(4) Cash and Due from Banks(a) Cash and due from banks as of December 31, 2005 and 2004 are as follows:(In millions of Won)2005
Cash on hand
Foreign currencies
Due from banks in Won
Due from banks in foreign currencies

2004
1,396,406
263,604
473,103
990,147

1,266,966
242,356
415,996
863,913

3,123,260

2,789,231(b) Cash and due from banks which are restricted from withdrawal as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Reserve deposits with the Bank of Korea:
In WonIn Foreign Currency
Won currency deposit
Foreign currency deposit

2004
177,818
191,394
81,59918,463

237,045
226,344
70,674
15,617469,274

549,680

Deposits with the Bank of Korea (reserve deposits) represent reserves, which the Bank is required to maintain for the payment of deposit
liabilities in accordance with the Banking Act and the Bank of Korea Act. Won currency deposits comprise deposits in Kookmin Bank deposited inconnection with the asset-backed securitization and other deposits. Foreign currency deposits consist of deposits provided by the Bank inconnection with derivative transactions, deposits made by P.T.Korea Exchange Bank Danamon to the Central Bank of Indonesia, and deposits
made by Banco KEB do Brazil S.A. to the Central Bank of Brazil in accordance with the related regulations and other deposits.

(c) The scheduled maturities of due from banks as of December 31, 2005 are as follows:(In millions of Won)
Due in less than
one yearDue from banks in Won
Due from banks
in foreign currencies

Due from one
to three years

Due after three
years

Total

213,808-259,295

473,103797,318

1,434

191,395

990,147

1,011,126

1,434

450,690

1,463,250

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(5) Securities(a) Securities as of December 31, 2005 and 2004 are as follows:(In millions of Won)
Debt
securities
Trading
Available-for-sale
Held-to-maturity
Investment in affiliates

2005
Equitysecurities

Total

Debt
securities

2004
Equitysecurities

Total

1,772,002
6,471,382
2,327,242-

96,7292,661,789
9,971

1,868,731
9,133,171
2,327,242
9,971

1,697,644
8,144,920
1,487,505-

59,943
1,567,031
25,994

1,757,587
9,711,951
1,487,505
25,994

10,570,626

2,768,489

13,339,115

11,330,069

1,652,968

12,983,037(b) Guarantee Deposits for Trust Operations
The Bank is required to annually deposit an amount with bank regulators equal to 0.05% of its capital stock until such deposit equals 10% of its
capital stock as a security deposit to continue its trust operations in accordance with the relevant Trust Act applicable in the Republic of Korea.
The outstanding book value (face value) of debt securities provided as security deposits as of December 31, 2005 and December 31, 2004 are
13,119 million ( 14,045 million) and 17,628 million ( 19,433 million), respectively.

(c) Securities Provided as Collateral
As of December 31, 2005, securities provided as collateral for borrowings from the Bank of Korea and other financial institutions are as follows:
Guarantees
Bank of Korea
Bank of Korea
Bank of Korea

Pledge value
1,509,729
68,287653,448

Bank of Korea
Korea Development Bank
Futures Corporations, Banks

299,428
34,962409,571

Merrill Lynch
Other financial institutions
Korea Futures Exchange
Deutsche Bundesbank

4,062
516,969
11,587600
3,508,643

110

Reference
Borrowings from the Bank of Korea (BOK)
Overdrafts from BOK
Bonds sold under repurchaseagreements (BOK)Inter-bank settlements
Asset-backed settlements
Futures transaction/Borrowings
denominated in foreign currencies
Credit default swap
Bonds sold under repurchase agreements
Futures transactions
Collateral as emergency borrowings

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

110111(d) Foreign Currency Denominated Debt Securities by Country
Foreign currency denominated debt securities, classified by country, as of December 31, 2005 and 2004 are as follows:(In millions of Won)
In thousandsof U.S.dollars(*)

Countries
Korea
USA
Philippines
BrazilOthers2005
In millionsof WonIn thousandsof U.S.dollars(*)

Ratio (%)

2004
In millionsof WonRatio (%)$

1,087,195
12,9885,608
5,144
116,478

1,101,328
13,157
5,681
5,211
117,992

88.57
1.06
0.46
0.42
9.49

$

860,751
49,1497,675
5,223
91,697

898,452
51,302
8,011
5,451
95,713

84.85
4.84
0.76
0.51
9.04

$

1,227,413

1,243,369

100.00$1,014,495

1,058,929

100.00(*) All currencies other then U.S. dollars were translated into U.S. dollars using the exchange rates as of the balance sheet dates.

(e) Equity Securities Accounted for Using the Equity Method
As of December 31, 2005, details of investments in affiliates accounted for using the equity method are as follows:(In millions of Won)

Beginning
Acquisition/
Acquisition balance under disposition or Translation
cost
equity method
dividend adjustment
KEBIT (*1)
KEB Fund Investor
ServicesCo., Ltd. (*2)
MP&T (*2) (*4)
CFEB (*3)
USAI (*3)

Increase (decrease)in equity of equity method investees
Equity inearnings
Accumulated
CapitalBook(losses)
deficitadjustment
value

13,80015,600(15,600)

-

-

-

-

-

2,550
850
8,281
2,881

2,550
850
4,153
2,841

-

(265)
(84)

(850)
113
422

-

241
-

2,550
4,242
3,179

28,36225,994(15,600)

(349)

(315)

-

241

9,971

(*1) The investee was disposed of during 2005.
(*2) These investment securities were excluded from the calculation applying equity method because they had assets less than

7,000 million as of the endof prior year and the change in investment arising from these companies were considered insignificant.
(*3) Based on the unaudited financial statements of the affiliates.
(*4) Including

850 million of the impairment losses on equity securities of MP&T which were valued at cost. MP&T is in the process of liquidation as ofDecember 31, 2005.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

As of December 31, 2004, details of investments in affiliates accounted for using the equity method are as follows:(In millions of Won)

Beginning
Acquisition/
Acquisition balance under disposition or Translation
cost
equity method
dividend adjustment
KEBIT (*1)
Doosan Heavy
Industries &Construction
Co., Ltd. (*2)
KEB Fund Investor
ServicesCo., Ltd. (*3)
MP&T (*3)
PUB (*4)
KEB Ire. (*5)
CFEB (*1)
USAI (*1)

Increase (decrease)in equity of equity method investees
Equity inearnings
Accumulated
CapitalBook(losses)
deficitadjustment
value

13,80014,971

-

-

1,086

(457)

-

15,60082,000250,085(264,561)-

18,396384(4,304)

-

2,550
850
38,493
3,436
8,281
2,881

2,550
850
82,869
7,019
4,704
-

(81,575)(6,389)2,870(3,858)
(268)
(605)
(261)

2,821
(362)
232

-

(257)
54
-

2,550
850
4,153
2,841

152,291

363,048(349,655)(4,992)

22,173(73)(4,507)25,994(*1) Based on the unaudited financial statements of the affiliates as of the end of year.
(*2) Amounts were excluded from the applying equity method due to the partial disposal of investment.
(*3) These investment securities were excluded from the calculation applying equity method because they had assets less than

7,000 million as of the endof prior year and the change in investment arising from these companies were considered insignificant.
(*4) Amounts were disposed of during 2004.
(*5) The investee was liquidated during 2004.

(f) Sales and Liquidation of Subsidiaries
On February 18, 2005, the Bank sold 2,760,000 shares of KEB Commerz Investment Trust Management Co., Ltd., a domestic subsidiary of theBank, to Landmark Investment Trust Management Co., Ltd. for 28,043 million. The Bank recorded a gain on disposition of available-for-salesecurities amounting of 11,275 million in 2005.
The Bank had entered into a contract to sell its investments in Pacific Union Bank (“PUB”), a U.S.-based subsidiary, to Hanmi Financial Corp., aholding company of Los Angeles-based Hanmi Bank. This sales transaction was finalized on April 30, 2004 upon the approval from Federal
Reserve Bank of San Francisco on April 12, 2004. The total number of shares of PUB sold was 6,624,052 shares and the sales proceed received
amounted to US$195,924 thousand. The Bank recorded a gain on disposition of available-for-sale securities amounting to 181,463 million in
2004.
KEB Ireland Ltd. (“KEB Ire”), a subsidiary of the Bank, was liquidated on September 30, 2004.

(g) Sale of Investments Accounted for Using the Equity Method
On December 17, 2004, the Bank sold four million shares (out of 16.4 million shares) of Doosan Heavy Industries & Construction Co., Ltd. at
49,566 million. As its ownership declined to 11.9%, the remaining 12.4 million shares with book value of 198,173 million were excluded fromthe application of equity method and reclassified into available-for-sale securities. The Bank recorded a gain on disposition of available-for-salesecurities of 593 million which was classified as non-operating income in 2004.
The Bank sold 12.4 million shares of the aforementioned company for 215,085 million in 2005. In 2005, the Bank recorded a gain on dispositionof available-for-sale securities amounting to 63,275 million which is classified as non-operating income.

112

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

112113(h) Impairment Loss
Impairment losses on equity securities for the year ended December 31, 2005 are as follows:(In millions of Won)
Issuer

Beginningbalance

Impairment
loss

Adjustedbook valueMarketable securities
in WonDaerim Corp.
Ssangyong Corp.

1,337
1,615
2,952

76
633
709

1,261
982
2,243

Non-marketablesecurities in Won

Daerim Corp. (Preferred stock)Daewoo Electronics Corp
Anam Co., Ltd.
The Korea Economic Daily
VCash Company Co. Ltd.
CHK SPC
Badbank Harmony Ltd.
(Preferred stock)
Korea Smart Card Co.Ltd.

136
32,970
4,400
126
49
2

111
7,503
3,666
6
49
2

25
25,467
734
120
-

5,479
1,624
44,786

5,479
1,203
18,019421
26,767

1

1

-

5,165
52,904

4,454
23,183711
29,721th

Other

KEB 4 SPC

Non-marketable securities
in foreign currencies

CLS Group Holdings

Impairment losses on debt securities for the year ended December 31, 2005 are as follows:(In millions of Won)
IssuerAvailable for sales
securities

Daewoo Commercial
Vehicle Co., Ltd.
Hanbosteel Co., Ltd
Kunyoung Co., Ltd.
TCW GEM2th
KEB 11 ABS Subordinated bondth
KEB 12 ABS Subordinated bond

Held to maturity
securities

KEB 6 ABS Subordinated bondth
KEB 8 ABS Subordinated bondth

Beginningbalance

Impairment
loss

Adjustedbook value

388
80
7
30
65,00066,000131,505

257
80
7
30
32,50028,191
61,065131
32,50037,80970,44026,3507,195
33,54526,350835
27,185

6,360
6,360

165,050

88,25076,800KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

The recovery of impairment losses on equity securities for the year ended December 31, 2005 is as follows:(In millions of Won)
Book value
prior to Adj.

IssuerRecovery of
impairment loss

Adjustedbook valueMarketablesecurities

Hynix (*1)

1,426,115

55,833

1,426,115

Non-marketablesecurities

Aekang

1,426,115

98
55,93198
1,426,213(*1) The amount of recovery of impairment losses reduced the amount of unrealized gain on available-for -sale securities (capital adjustment) and did not
impact on the adjusted book value.

The recovery of impairment losses on debt securities for the year ended December 31, 2005 is as follows:(In millions of Won)
Book value
prior to Adj.

IssuerAvailable-for-sales
securities

TCW GEM2(*1)
PEI (*2)

Held-to-maturity
securities

KEB 6th ABS Subordinated bond
KEB 7th ABS Subordinated bond
KEB 8th ABS Subordinated bond
KEB 9th ABS Subordinated bond

Recovery of
impairment loss

Adjustedbook value

3,633
3,633

1,879
917
2,796

-

36,637
31,401
30,25044,907
143,195

18,363
2,393
10,7508,161
39,66755,00033,79441,00053,068
182,862

146,828

42,463

182,862(*1) The recovery of impairment losses is the amount resulted from collecting the principal sum.
(*2) Transferred as accounts receivable as of December 31, 2005.

(i) The scheduled maturities of available-for-sale and held-to-maturity debt securities as of December 31, 2005 are as
follows:(In millions of Won)
Due in lessthan one year
Government bonds
Finance debentures
Corporate bonds
Other securities
Foreign currency
denominated securities
Off-shore debt securities

114

Due after one
year throughthree years

Due after three
years

Total

1,049,331
1,687,529
225,559
296,819

1,613,683
2,275,391
599,374-

1,022,523
345,228202,253-

3,685,537
4,308,148
1,027,186
296,819

62,334
108,719

1,035
221,336

40,374
819,138

103,743
1,149,193

3,430,291

4,710,819

2,429,516

10,570,626

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

114
115(j) Private Placement Funds
Major assets for private placement funds held by the Bank and its result of operation as of December 31, 2005 are as follows:(In millions of Won)
Forever 12M
Private Bond 2
Due from banks in Won
Call loans
Available-for-sale securities
OthersSAFE&PLUS
Private Hybrid 5

Total

1,025
20,327
199,661
26,819243
1,119
28,077239

1,268
21,446
227,738
27,058247,832

29,678277,510(6) Loans(a) Loans as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Loans in Won
Loans in foreign currencies
Bills bought in Won
Bills bought in foreign currencies
Call loans
Credit card accounts
Securities purchased under resale agreements
Other
Less: allowance for loan losses
net deferred loan fees and costs

2004

28,566,644
5,459,055
1,917,431
3,234,266
1,273,993
2,260,486
774,608
43,486,483(598,422)(2,667)25,760,946
5,732,988
2,017,030
3,260,155
833,349
2,619,986
1,230,000
628,51242,082,966(912,467)(1,271)42,885,394

41,169,228

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(b) Foreign Currency Loans By Country
As of December 31, 2005 and 2004, loans denominated in foreign currencies classified by nationality of borrowers are as follows:(In millions of Won)

Countries

In thousandsof U.S.dollars(*)

Korea
Japan
Indonesia
Others2005
In millionsof WonRatio (%)

In thousandsof U.S.dollars(*)

2004
In millionsof WonRatio (%)$

3,615,500
272,770
45,753
1,454,975

3,662,502
276,316
46,3481,473,889

67.09
5.06
0.85
27.00

$

3,999,277
225,52159,372
1,208,250

4,174,445
235,399
61,973
1,261,171

72.81
4.11
1.08
22.00

$

5,388,998

5,459,055

100.00$5,492,420

5,732,988

100.00(*) Loans denominated in other foreign currencies were presented at equivalent U.S. dollar amounts using the exchange rates as of the balance sheet date.

(c) Allowances for Loan Losses
Changes in allowances for loan losses for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005

2004

Balance at the beginning of the year
Provision for loan losses
Loans charged off
Transfer from repurchase of loans
from KAMCO and others
Translation adjustments and others
Change of present value discount912,467
43,341(588,761)

2,441,778
1,001,057(2,894,081)

250,417(6,826)(12,216)

394,161(16,623)(13,825)

Balance at the end of the year

598,422

912,467

Ratios of allowance for loan losses to total loans (net of present value discount) for the years ended December 31, 2005, 2004 and 2003 are 1.4%,
2.2% and 5.4%, respectively.
As of December 31, 2005 and 2004, the Bank’s loans, of which the balance had been already charged off without the expiry of the Bank’s legal
claim rights against borrowers or guarantors, amounted to 2,156,489 million and 5,393,852 million, respectively.
The loans in Won in 2005 and 2004 amounting toin CMA operating assets of the Bank.

214,740 million and

235,425 million, respectively, are the discounted notes that are included(d) Restructured Loans
The Bank recognized losses on troubled loans restructured under workout plans or other similar rescheduling agreements if the total discounted
future cash receipts specified by the modified terms of rescheduled loans are less than the nominal amount of those loans. The present value of
total future cash receipts under the restructuring plans which have been decided by December 31, 2005, discounted using interest rates of 5.25%
to 15.25%, is 813,813 million which is less than their nominal value of 870,057 million.
The changes in present value discount and net deferred loan fees and costs of the Bank’s restructured loans for the year ended December 31,
2005 are as follows:
Balance atJanuary 1, 2005
Allowance for loan losses(Present value discount)
Net deferred loan fees and costs

116

68,4601,271

Addition
2,335

Deduction
12,216939(In millions of Won)
Balance at
December 31,2005
56,244
2,667

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

116
117

(7) Cash Management Accounts
Cash management accounts (“CMA”) comprise customers’ deposits maturing in 180 days or less which are invested in securities approximating
the value of such deposits. The income from the investments, less management fees, is distributed to the accounts on the contract maturity date.
If the deposit is withdrawn before maturity, distribution is based on a rate computed daily. CMA assets as of December 31, 2005 and 2004
comprise the following:(In millions of Won)
2005
Notes discounted

2004
214,740

235,425(8) Fixed Assets
Fixed assets as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Investment assets
Tangible assets:
Land
Buildings
Office facilities held on lease
Equipment
Construction in-progress
Less: accumulated depreciation
Intangible assets:
Development costs
Others
Foreclosed assets:
Acquisition costLess: allowance for possible losses
on foreclosed assets

2004
895

1,077

383,118
487,127
78,188630,464
1,578,897(691,004)
887,893

387,825
459,823
65,267705,913351
1,619,179(716,223)
902,956

82,415
2,083
84,49840,0983,133
43,231

73

70

73

70

973,359

947,334

As of December 31, 2005, the value of the Bank and subsidiaries’ domestic land as determined by the tax authorities for property tax assessment
purpose amounted to 592,298 million (book value 382,871 million).
As of December 31, 2005, a substantial portion of the Bank’s buildings, equipment and foreclosed assets are insured against fire and othercasualty losses with a coverage amounting to 450,656 million. The Bank maintains insurance coverage for cars and vehicles against accident
losses and liabilities. Leasehold improvements are also insured for theft and casualty losses.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(9) Other Assets
Other assets as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Guarantee deposits
Accounts receivable
Accrued income
Prepaid expenses
Deferred tax assets (note 24)
Derivative instrument assets
Others

2004
485,124
3,569,567
348,496
66,7488,240
496,822
1,287,907

501,826
2,757,882
287,920
98,565
207,814738,562
648,640

6,262,904

5,241,209(10) Deposits(a) Deposits as of December 31, 2005 and 2004 are as follows:(In millions of Won)
Interest rate (%) at Dec. 31, 2005

2005

2004

Deposits in Won:
Demand deposits
Savings and time deposits
Mutual installment saving

0.00~0.20
0.00~6.50
2.50~3.90

15,496,298
13,777,961
287,600
29,561,859

13,634,444
16,092,724
496,128
30,223,296

Deposits in foreign currencies:
Demand deposits
Savings and time deposits

0.00~1.33
1.24~4.54

3,482,442
4,704,716
8,187,158

2,969,691
4,736,164
7,705,855

Certificates of deposits

2.40~3.20

2,989,056

3,327,713

40,738,073

41,256,864(b) The scheduled maturities of deposits as of December 31, 2005 are as follows:(In millions of Won)
Due in less than
one year
Deposits in Won
Deposits in foreign currencies
Certificates of deposits

118

Due from one
to three years

Due after
three years

Total

12,005,089
4,986,792
2,989,056

1,910,530
50,955-

15,646,240
3,149,411-

29,561,859
8,187,158
2,989,056

19,980,937

1,961,485

18,795,651

40,738,073

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

118
119

(11) Borrowings(a) Borrowings as of December 31, 2005 and 2004 are as follows:(In millions of Won)
Interest rate (%) at Dec. 31, 2005
Borrowings in Won:
Borrowings from the Bank of Korea
Borrowings from Governmental fundand Public corporation
Borrowings from other banks
Borrowings from others
Borrowings in foreign currencies:
Short-term borrowings
Medium and long-term borrowings
Refinance
Borrowings from banks
for subordinated loans
Borrowings from others

Due to Bank of Korea in foreign currencies
Securities sold under repurchase agreements
Bills soldCall money

2005

2004

2.00

1,194,989

1,062,945

1.5~4.25
1.5~4.55
2.0~4.90

249,332
222,466
508,652
2,175,439

297,889
116,971
501,574
1,979,379

0.09~7.87
3ML+40BP~6ML+60BP
3.91~4.62

2,260,306
175,274
293,770

1,761,068
374,610
156,570

2.35~2.55
0~4.27

10,199743,765
3,483,314

16,404
665,734
2,974,386

0.1~6ML+50BP
2.30~5.00
2.50~4.00
2.55~4.31

5,257
734,762272,289
86,222
6,757,283

135,721732,110130,256
199,370
6,151,222

As of December 31, 2005, in the normal course of funding activities the Bank provided securities as collateral for borrowings from the Bank of
Korea and other financial institutions (see note 5).

(b) Subordinated borrowings as of December 31, 2005 and 2004 are as follows:(In millions of Won, In thousands of U.S. Dollars)

Borrowings inforeign currencies

LenderInterest rate (%) at Dec. 31, 2005

Commerzbank

-

2005

2004
-

36,533(US$35,000)(c) The scheduled maturities of borrowings as of December 31, 2005 are as follows:(In millions of Won)
Due in less than
one year
Borrowings in Won
Borrowings in foreign currencies
Due to bank of Korea
in foreign currencies

Due from one
to three years

Due after
three years

Total

1,220,500
3,472,081

136,273
11,233

818,666-

2,175,439
3,483,314

5,257

-

-

5,257

4,697,838

147,506

818,6665,664,010

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(12) Debentures(a) Debentures as of December 31, 2005 and 2004 are as follows:(In millions of Won)
Interest rate (%) at Dec. 31, 2005
Debentures in Won:
Debentures
Subordinated debentures
Hybrid Tier 1

2005

3.50~7.73
4.90~8.00
8.50

3,700,000
1,293,130
250,000
5,243,130(8,109)5,235,021

4,384,000
1,442,504
250,000
6,076,504(13,052)
6,063,452

6ML+0.10~5.50
3ML+2.00~5.00

250,821497,433
748,254(4,350)743,904

86,097419,757
505,854(2,428)503,426

5,978,925

6,566,878

Discounts on debentures
Debentures in foreign currencies:
Debentures
Subordinated debentures

2004

Discounts on debentures(b) Subordinated debentures as of December 31, 2005 and 2004 are as follows:(In millions of Won, In thousands of U.S. Dollars)
Maturity

Interest rate (%) at Dec. 31, 2005

2005

2004

Sold to general public

Feb. 28, 2005
~ Nov. 28, 2014

4.90~8.00

1,293,130

1,442,504

JPMorgan Chaseand Merrill Lynch(*1)

Nov. 18, 2006

3ML+2.00

202,600(US$200,000)

208,760(US$200,000)

Citigroupand HSBC(*1)(*2)

June 10, 2015

5.00

294,833(US$291,050)-

Credit Suisse (*1)(*3)

June 30, 2010--

210,997(US$202,143)

1,790,563

1,862,261(*1) The first underwriters(*2) After June 10, 2010, the optional early redemption right can be exercised.
(*3) On June 30, 2005, this was repaid due to exercising the Bank’s optional early redemption right.

Certain subordinated debentures are under swap contracts in order to hedge risks from changes in interest rates and exchange rates. Gain andloss on foreign currency transactions amounting to W9,067 million and W2,220 million, respectively, have been accounted for in connection tosuch contracts for the year ended December 31, 2005.

(c) As of December 31, 2005, Hybrid Tier 1 bond is as follows:(In millions of Won)Type
Hybrid Tier 1(*1)

Maturity (*2)

Interest rate (*3)

May 28, 2033

8.50%(*1) After May 29, 2008, call option can be exercised under the authorization of Governor of Financial Supervisory Service.
(*2) After expiration, the bond can be extended under the same terms.
(*3) Beginning May 29, 2013, the interest rate increases to 10.0%

120

Amount250,000

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

120
121(d) The scheduled maturities of debentures as of December 31, 2005 are as follows:(In millions of Won)
Due in less than
one year
Debentures in Won
Debentures in foreign currencies

Due from one
to three years

Due after
three years

Total

1,510,626
380,485

3,232,504
72,936500,000
294,833

5,243,130
748,254

1,891,111

3,305,440

794,833

5,991,384(13) Retirement and Severance Benefits
Changes in retirement and severance benefits during the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Balance at the beginning of the year
Provisions for retirement and severance benefits
Severance payments
Adjustments of foreign exchange transactions
Deposits of insurance for retirement and severance benefits
Transfer to the National Pension Fund
Balance at the end of the year

2004
124,005
60,942(7,643)(267)
177,037(130,185)(838)

110,215
55,990(41,933)(267)
124,005(88,708)(851)

46,01434,446(14) Other Liabilities
Other liabilities as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Accrual for retirement and severance benefits (note 13)
Allowance for guarantees and acceptanceDue to trust accountForeign exchange remittance pending
Accounts payable
Accrued expenses
Unearned income
Deposits for letter of guarantees and others
Deferred tax liabilities (note 24)
Derivative instrument liabilities (note 19)
Suspense receipt accrual
Liability for GIRO accounts
Agency receipt liability
Others2004
46,014
41,336344,319
248,3123,623,890
640,854
54,143
173,990
31,740652,937
64,439103,630
660,597
740,448

34,446
19,750305,673
253,5142,726,722
787,744
52,323160,006
831,403
155,480
81,960564,844
228,641

7,426,649

6,202,506

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(15) Asset Revaluation
In accordance with the Asset Revaluation Law, the Bank elected to revalue lands, buildings and investment securities on January 1, 1993. The
revaluation gain of 370,730 million represents the difference between the revalued amount and the net book value of the revalued assets at
January 1, 1993, of which 359,608 million, net of 3% revaluation taxes, was used for disposition of accumulated deficit.

(16) Retained Earnings (Accumulated Deficit)(a) Consolidated retained earnings (consolidated accumulated deficit) as of December 31, 2005 and 2004 are as
follows:(In millions of Won)
2005
Other statutory reserves
Unappropriated retained earnings(Undisposed accumulated deficit)

2004
34,96530,694

1,323,899(598,006)

1,358,864(567,312)(b) Other Statutory Reserves
Relevant Japanese regulations require the Bank’s overseas branches located in Japan to appropriate a minimum of 10% of annual income after
income taxes as a Japanese legal reserve, until such reserve equals ¥2,000 million. This reserve is not available for the payment of cash
dividends and may be utilized upon liquidation of the Japanese branches. In addition, Singapore and Hanoi branches’ statutory reserves areincluded in this reserve amount.

(17) Capital Adjustments
Capital adjustments as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Unrealized gain on available-for-sale securities
Unrealized loss on held-to-maturity securities
Unrealized loss on investments in affiliates
Stock option
Discounts on stock issued
Capital adjustment of consolidated subsidiaries

122

2004
1,406,314
(671)
(850)
14,959(324,854)
3,660

594,908(1,457)
7,649(324,854)
10,717

1,098,558

286,963

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

122
123

(18) Stock Options
As of December 31, 2005, stock options granted to the Bank’s employees and executives are as follows:

Grant date
March 25, 2000
March 28, 2000(*)
May 18, 2000
September 14, 2000(*)
March 13, 2001
March 30, 2002(*)
August 26, 2002
March 31, 2003(*)
September 4, 2003(*)
September 16, 2003
February 13, 2004
March 7, 2005
June 29, 2005

Stock
options
granted
784,000
53,369400,000
74,716562,000
32,020725,000
101,401
53,369120,000
2,450,000
1,435,000
200,000
6,990,875

Stock options
expiredto dateStockoptions
exercisedStock
options
outstanding

Exercise pricein Wonper share

761,500
377,500
15,00024,015421,850
54,400380,000
80,0002,114,265

22,50010,000121,000
42,990196,490

53,36912,50074,716
426,000
8,005
260,160
101,401
53,36965,6002,070,000
1,355,000
200,000
4,680,120

10,00015,927
10,00015,9275,000
70,7156,300
13,266
15,533
5,000
7,000
8,800
9,000

Exerciseperiod2003.03.26~2006.03.25
2003.06.22~2006.03.28
2003.05.19~2006.05.18
2003.09.15~2006.09.14
2004.03.14~2007.03.13
2005.03.31~2008.03.30
2005.08.27~2008.08.26
2006.04.01~2009.03.31
2006.09.05~2009.09.04
2006.09.17~2009.09.16
2006.02.14~2009.02.13
2007.03.08~2010.03.07
2007.06.30~2010.06.29(*) Granted from KEBCS prior to the merger with the Bank. Exercise price per share and the shares outstanding were adjusted from based on the merger
ratio.

In accordance with the agreement of the board of directors of the Bank, stock options were granted to the executives and the employees of theBank. All stock options granted prior to December 31, 2003 were accounted for using minimum value method using the Black-Scholes model.
Effective on January 1, 2004, the Bank is required to use fair value method using the Black-Scholes model for all new stock options granted after
December 31, 2003 in accordance with Korea Accounting Institute Interpretation 39-35. However, old options granted prior to December 31, 2003
are still allowed to be accounted for using minimum value method using the Black-Scholes model.
Primary assumptions utilized to determine compensation costs under fair value basis method are as follows:

Grant date
March 25, 2000
March 28, 2000(*)
May 18, 2000
September 14, 2000(*)
March 13, 2001
March 30, 2002(*)
August 26, 2002
March 31, 2003(*)
September 4, 2003(*)
September 16, 2003
February 13, 2004
March 7, 2005
June 29, 2005

Risk-freeinterest rate (%)

Expected exercise
period (year)

Volatilityof the underlying
stock price (%)

Expected
dividend rate (%)

6.35
6.70
6.35
6.70
6.35
6.39
6.35
4.62
4.40
4.54
5.12
4.43
3.89

6
3.25
6
3
6
3
6
3
3
6
5
5
5

90.01
49.68
90.01
61.29
90.01
63.53
90.01
58.35
50.30
89.81
84.86
76.70
71.85

0.0
0.0
0.0
0.0
0.0
4.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0

(*) Granted from KEBCS prior to the merger with the Bank. Exercise price per share and the shares outstanding were adjusted based on the merger ratio.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

Changes in stock options during the year ended December 31, 2005 are as follows:(In millions of Won)
2005
Beginning balance
Compensation costs for the year ended December 31, 2005
Decrease due to the stock options exercised

7,649
8,531
(1,221)Ending balance

14,959The difference between compensation costs calculated using minimum value method and those calculated using fair value method is as follows:(In millions of Won)
Minimum value method
Total compensation costs
Compensation costs for the year
ended December 31, 2005
Accumulated compensation costs
as of December 31, 2004
Compensation costs to be recognized

Fair value method

23,14524,856

8,531

8,725

7,579
7,035

9,071
7,060

If the Bank applies fair value method in calculating compensation costs, ordinary income, net income, ordinary earnings per share and net
earnings per share for the year ended December 31, 2005 are as follows:(In millions of Won)
As reported
Ordinary income
Net income
Ordinary earnings per share in won
Net earning per share in won

Adjustment

1,917,201
1,933,891
2,973
2,999

Revised
(194)
(194)
(1)
(1)

1,917,007
1,933,697
2,972
2,998

140,000 shares of stock option were canceled due to the retirement before agreed service period. The number of exercised stock options was
196,000 shares and the difference between market value and exercise price that the Bank paid was 1,221 million.

(19) Commitments and Contingencies(a) Guarantees and Acceptances
The Bank and subsidiaries make various commitments whereby it accepts customer contingencies or guarantees customer’s liabilities in thecourse of normal business to extend credit to customers. The confirmed Guarantees and acceptances outstanding as of December 31, 2005 and2004 are summarized as follows:(In millions of Won)
2005
Guarantees and acceptances in Won
Guarantees and acceptances in foreign currencies

124

2004
747,317
1,835,233

798,429
1,813,960

2,582,550

2,612,389

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

124
125
The unconfirmed guarantees and acceptances and endorsed notes with collateral outstanding as of December 31, 2005 and 2004 aresummarized as follows:(In millions of Won)
2005

2004

Letters of credit issued but not yet drawn
Other guarantees and acceptances

3,182,104
12,1003,194,204

3,732,571
17,405
3,749,976

Endorsed notes with collateral

52,672
3,246,876

94,493
3,844,469

Allowances for guarantees and acceptances as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005

AmountAllowances for guarantees
and acceptances
Ratio (%)

Confirmed guarantees
and acceptances

Unconfirmed guarantees
and acceptances(*)

Endorsed notes
with collateral(*)

2,582,550

3,194,204

52,676

5,829,430

33,811
1.31

7,262
0.23

263
0.50

41,336
0.71

Total(*) The unconfirmed guaranteed and acceptances and endorsed notes with collateral are required to accrue allowance for estimated potential losses from2005 (see note 3(e)).

(In millions of Won)
2004

AmountAllowances for guarantees
and acceptances
Ratio (%)

Confirmed guarantees
and acceptances

Unconfirmed guarantees
and acceptancesEndorsed notes
with collateral

2,612,389

3,749,976

94,4936,456,858

19,7500.76--

19,7500.31

Total

The guarantees and acceptances denominated in foreign currency classified by country as of December 31, 2005 and 2004 are as follows:

Countries
Korea
FranceGermany
UK
U.S.A.
Japan
OthersThousands of
U.S. dollars

2005
Millions of
Won

Ratio (%)

Thousands of
U.S. dollars

2004
Millions of
Won

Ratio (%)$

1,507,523
47,65637,552
19,62039,50625,385
134,439

1,527,121
48,27538,04019,87540,02025,715
136,187

83.21
2.63
2.07
1.08
2.18
1.40
7.43

$

1,506,800
60,02422,443
7,723
29,96929,537
81,346

1,572,798
62,65323,426
8,061
31,28230,831
84,909

86.71
3.45
1.29
0.44
1.72
1.70
4.69

$

1,811,681

1,835,233

100.00$1,737,842

1,813,960

100.00KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

The Bank and subsidiaries’ loan commitments as of December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Commitments for loans in Won
Commitments for foreign currency loans
Securities purchase commitments in Won
Other commitments in foreign currency

2004

31,162,039
2,074,953
409,033
8,993,490

605,206
80,69550,00074,632

42,639,515

810,533

The Bank accrued allowance for estimated potential losses on commitments considering the credit conversion factor based on the new standard
of Bank for International Settlements Accord by applying the same methodology that was used to determine the allowance for loan losses. As of
December 31, 2005, the Bank recognized 90,781 million of provision for abovementioned commitments (see note 3(e)).
Loans written off amounted to2,156,489 million and

5,393,852 million as of December 31, 2005 and 2004, respectively.

Government bonds sold over the counter as of December 31, 2005 and 2004 amounted toEndorsed notes without collateral held by the Bank amount torespectively.

2,073,972 million and

13,878 million and

24,484 million, respectively.

1,479,383 million as of December 31, 2005 and 2004,

The Bank purchased the note forged by the employee of the Kukdong City Gas Co. Ltd and transferred it by endorsement without collateral
recognizing as suspense receivables in other assets amounting to 32,601 million as of December 31, 2005. The Bank is in litigation for theforged note and recognized 32,601 million of other liability related to these lawsuits.

(b) Derivative Financial Instruments
Contracts of derivative financial instruments as of December 31, 2005 and 2004 are as follows:(In millions of Won)
Trading
Foreign currency related contracts
Forward contracts
Future contracts
Swap contracts
Option contracts purchased
Option contracts soldInterest rate related contracts
Future contracts purchased
Future contracts sold
Swap contracts
Option contracts purchased
Option contracts soldIndex option related contracts
KOSPI 200 futures
Option contracts purchased
Option contracts sold

126

2005
Hedging

Total

Trading

2004
Hedging

Total

21,706,315
237,245
4,406,534
1,389,356
2,788,144
30,527,594-

21,706,315
237,245
4,406,534
1,389,356
2,788,144
30,527,594

16,491,751
162,624
3,128,638
1,698,416
1,358,540
22,839,969

1,887
1,887

16,493,638
162,624
3,128,638
1,698,416
1,358,540
22,841,856

292,613
10,032,918
10,325,531

433,564
433,564

292,613
10,466,482
10,759,095

67,775
1,445,254
7,495,779
140,913
154,4829,304,203

104,380
104,380

67,775
1,445,254
7,600,159
140,913
154,482
9,408,583

45,757
207,352
1,047,215
1,300,324-

45,757
207,352
1,047,215
1,300,324

21,49994,736130,152
246,387-

21,49994,736130,152
246,387

42,153,449

433,564

42,587,013

32,390,559

106,267

32,496,826

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

126
127
Gain or loss on valuation of derivative for the year ended December 31, 2005 and the related accumulated gain or loss on them are as follows:(In millions of Won)
Valuation gains or losses (I/S)(*1)
Trading
Gains
Foreign currency related contracts
Forward contracts
Future contracts purchased
Swap contracts
Option contracts purchased
Option contracts soldInterest rate related contracts
Swap contracts
Option contracts purchased
Option contracts soldIndex option related contracts
Option contracts purchased
Option contracts soldValuation gains

Hedging

Losses

Gains

Total
Loss

Gains

or losses (B/S)
LossesAssetsLiabilities

210,151
34,153
22,179266,483

151,498
44,402
18,557
214,457--

210,151
34,153
22,179266,483

151,498
44,402
18,557
214,457

228,681
171,230
15,773415,684

346,571
94,233
11,237452,041

23,100348
23,44822,582
88
22,670

5,876
5,876

10,119
10,11928,976348
29,32432,70188
32,78974,64874,64895,767
95,767

14,6301,981
16,611

15,301
1,747
17,048--

14,6301,981
16,611

15,301
1,747
17,048

6,490
6,490

105,129
105,129

306,542

254,175

5,876

10,119312,418

264,294

496,822652,937-(*1) Included in gain and loss on foreign currency transactions which is treated as other operating income and expenses.

Gain or loss on valuation of derivative for the year ended December 31, 2004 and the related accumulated gain or loss on them are as follows:(In millions of Won)
Valuation gains or losses (I/S)(*1)
Trading
Gains
Foreign currency related contracts
Forward contracts
Swap contracts
Option contracts purchased
Option contracts soldInterest rate related contracts
Swap contracts
Option contracts purchased
Option contracts soldIndex option related contracts
Option contracts purchased
Option contracts soldValuation gains

Hedging

Losses

Gains

Total
Loss

Gains

or losses (B/S)
LossesAssetsLiabilities

250,212194,297
30,289474,798

431,041
110,201
27,793569,035--

250,212194,297
30,289474,798

431,041
110,201
27,793569,035

391,399
215,632
34,330641,361555,586
128,386
33,416717,388

56,742
1,276
58,018

71,117423
71,540

1,951
1,951

7,692
7,692

58,693
1,276
59,96978,809423
79,232

96,922
88
97,010111,917348
112,265

7,289
66
7,355

54
1,722
1,776

-

-

7,289
66
7,355

54
1,722
1,776

191
191

1,750
1,750

540,171642,351

1,951

7,692

542,122650,043738,562

831,403(*1) Included in gain and loss on foreign currency transactions which is treated as other operating income and expenses.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

The above transactions with respect to securities and bonds are for the purpose to hedge risks from changes in exchange rates or interest rates,
and to generate profits from trading derivative instruments.
Outstanding hedging transactions above include both derivative transactions accounted for using hedge accounting treatment and those held forthe purpose of hedging risk. As of December 31, 2005, hedged items consist of securities and bonds, and risks from change in fair values arehedged by interest rate swaps. Based on the valuation of the hedged items under fair value hedge accounting, gains and losses on valuation of
securities amounting to 1,053 million and 3,656 million, respectively, and gains and losses on valuation of bonds amounting to 9,067 million
and 2,220 million, respectively, have been accounted for as gains and losses on foreign currency transactions for the year ended December 31,
2005.

(c) Litigation
The Bank is in litigation as the plaintiff or the defendant in various legal actions arising from the normal course of operation. The aggregate
amounts of these claims brought by and against the Bank were approximately 404,855 million (4,615 cases) and 66,102 million (147 cases),
respectively, as of December 31, 2005. The Bank recognized 4,767 million of other liability related to these lawsuits. The Bank believes that theoutcome of these matters will not have a material impact to the Bank’s financial position or operations.
Also the Bank had floating rate bonds of US$7,000 thousand (book value US$3,500 thousand) issued by Pacific Elephant Fund, and made aguarantee-payment amounting to US$10,112 thousand (US$10,112 thousand of provisions) in association with the default of Pacific Rainbow fundfor which the Bank has provided guarantee. The Bank brought a case to court in relation to the breach of performance of commitment against
the Dongbuanam Semiconductor. On October 27, 2005 compulsory arbitration by court was determined.
According to the arbitration, Dongbuanam semiconductor Inc. is to repay US$4,382 thousand with unequal installment on floating rate bondissued by Pacific Elephant Fund for 16 years from 2005 to 2020, and the Bank recognized aforementioned amount as receivables in foreign
currency. The difference between aforementioned amount and the book value amounting to US$882 thousand was accounted for as recovery of
impairment losses on available-for-sales securities. Payment of US$14,369 thousand on behalf of the Pacific Rainbow Fund will be repaid by
Dongbuanam semiconductor Inc. with an unequal installment for 16 years from 2005 to 2020. Above repayment related to Pacific Elephant Fundis to be distributed to Shinhan merchant bank, Choongang Merchant Bank and the Bank at the rate of amount of principal according by mutual
agreement on January 10, 2006. The Bank recognized US$7,138 thousand, distributed amount at the rate of amount of principal, as accountreceivable in foreign currency, and reversed US$7,138 thousand of related provision. Also the guarantee-payment amounting to US$2,974
thousand which cannot be repaid by Dongbuanam semiconductor Inc. was charged off.
As of December 31, 2005 the Bank recognized US$11,315 thousand of account receivable in foreign currency excluding US$205 thousand of
repayment during 2005 and US$2,009 thousand of provision related to aforementioned receivables. The actual loss may differ from the provision
for account receivable losses set by the Bank.

(d) Asset Backed Securitization
On March 30, 2001, the Bank sold certain non-performing loans of leasing companies amounting to 589,175 million to a Special Purpose
Company (“5th SPC”) and received 300,000 million and 123,175 million in cash and subordinated bonds, respectively.
On June 29, 2001, the Bank sold certain non-performing loans amounting to 998,923 million to a Special Purpose Company (“6th SPC”) andreceived 200,000 million and 182,301 million in cash and subordinated bonds, respectively. In relation to this asset backed securitization(“ABS”), the Bank provided deposits equivalent to 40,800 million as collateral to Kookmin Bank.
On November 29, 2001, the Bank sold certain non-performing loans amounting to 163,750 million to a Special Purpose Company (“7th SPC”)
and received 37,022 million and 36,100 million in cash and subordinated bonds, respectively. According to the business transaction
agreement (the “Agreement”), the transferee and the trustee could claim damages arising from the transferor’s performance of a duty to thedefault collateral within the limit of the contract amount when the securitized asset becomes unqualified under the conditions of the written
contract or when the asset value is reduced arising from a significant misstatement as a result of a due diligence report for the assets or when
the debtor delayed the payment of the principal for more than six months. Also, when the duty to perform arises, the Bank should pay thedamage amount to the transferee with cash within seven business days from written notification.
On December 9, 2003, the Bank sold certain non-performing loans amounting to 155,391 million to a Special Purpose Company (“8th SPC”) andreceived 60,000 million and 59,000 million in cash and subordinated bonds, respectively, in relation to this asset-backed securitization(“ABS”).
On June 17, 2004, the Bank sold certain non-performing loans amounting to 206,442 million to a Special Purpose Company (“9th SPC”) andreceived 80,000 million and 70,000 million in cash and subordinated bonds, respectively, in relation to this asset-backed securitization(“ABS”).

128

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

128
129
On September 17, 2004, the Bank sold certain non-performing loans amounting to 147,464 million to a Special Purpose Company (“10th SPC”)
and received 55,000 million and 45,000 million in cash and subordinated bonds, respectively, in relation to this asset-backed securitization(“ABS”).
On June 13, 2005, the Bank sold certain non-performing loans amounting to 207,886 million to a Special Purpose Company (“11th SPC”) andreceived 80,000 million and 65,000 million in cash and subordinated bonds, respectively, in relation to this asset-backed securitization(“ABS”). The difference between the book value and the sales price amounting to 6,619 million was recognized as a gain on disposal of loans forthe year ended December 31, 2005.
On November 28, 2005, the Bank sold certain non-performing loans amounting to 178,587 million to a Special Purpose Company (“12th SPC”)
and received 70,000 million and 66,000 million in cash and subordinated bonds, respectively, in relation to this asset-backed securitization(“ABS”). The difference between the book value and the sales price amounting to 12,117 million was recognized as a loss on disposal of loans
for the year ended December 31, 2005.
According to the business transfer agreement (the "Agreement) of 8th, 9th, 10th, 11th and 12th SPC, the transferee and the trustee could claim
the performance of transferor's responsibility on the collateral pursuant to the contract amount when (1) the securitized assets are consideredunqualified as of the transfer or confirmed date under the conditions of the written contract, (2) it was determined that senior rights on thecollaterals stated in the register book were not identified at the time of the due diligence on the securitized assets, or (3) additional senior rights
are identified according to the laws or regulations omitted from the due diligence report (only if the laws or regulation were in effect prior to theconfirmation date of the securitized assets). The Bank is obligated to perform its responsibility on the collateral within three business days fromthe date the request is made by transferee or trustee.
The Bank’s potential exposures in relation to the indemnification on the securities assets for 5th, 6th, and 7th SPC are 27%, 34% and 36% of thetotal proceeds, respectively which is equivalent to US$84,000 thousand ( 85,092 million), 130,000 million, and 26,000 million, respectively.

(e) Loans Sold under Repurchase Agreements
The Bank is obliged to repurchase some of the loans previously sold to the Korea Asset Management Corporation (“KAMCO”) under certain
conditions including the following:- When it is considered impossible to collect the loans and interest because borrowers delay their repayment of loans and interest over six
months.
- When it is considered impossible to collect the loans and interest due to the abrogation of court-receivership process and the cancellation ofmediation.
As of December 31, 2005, KAMCO and other loan purchasers may exercise the resale option for loans amounting to 201,292 million. An
additional loss or profit may occur, depending on the loan classification on valuation of loans or final arrangement on loans when KAMCO andother loan purchasers exercise their repurchase agreement.

(f) Debt to Equity Swap of Hynix Semiconductor Inc.
The Bank’s outstanding loans (including payment guarantees) and available-for-sale securities including debt-to-equity securities with respect toHynix Semiconductor Inc. (“Hynix”) amount to 178,886 million and 1,426,115 million, respectively, as of December 31, 2005. As of December
31, 2005, the Bank’s loan for Hynix is classified as normal.
On April 21, 2005, Hynix and the Creditors’ Council agreed to the condition that includes a certain amount of external financing and a new
agreement to satisfy for an early termination of Joint Management with the Creditors’ Council. Hynix fulfilled the condition and terminated Joint
Management with the Creditors’ Council on July 12, 2005 after achieving more than 1.0 trillion of external financing and the new agreement on
which Hynix is required to have prior discussions with Creditors’ Council on management appointment, issues related with M&A, and othersignificant management decisions which may have great influence to Hynix. In addition, the Bank sold 18,416 thousand shares of Hynix, which ispermitted to sale in over-the-counter market by Financial Institution Creditors Committee, at 350,146 million on October 26, 2005.
KEB Capital Co., Ltd. (“KEBC”), the Bank’s consolidated subsidiary, sold 681 thousand shares of Hynix at

12,942 million on October 26, 2005.

(g) Loans to Workout Companies
As of December 31, 2005, the Bank’s outstanding loans and guarantees to the companies under workout programs amounted to 965,300
million. Actual losses on the above loans and guarantees may differ from the allowances for such losses provided by the Bank. No adjustments
have been made in the accompanying non-consolidated financial statements related to such uncertainties.

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(h) Debt to Equity Swap of SK Networks Co., Ltd.
As of December 31, 2005, the Bank has loans of 171,423 million and available-for-sale securities of 130,461 million with respect to SK
Networks Co., Ltd. and set allowance for loan losses and payment guarantees of 16,780 million in association with these loans. The actual loss
may differ from the allowance for loan losses and impairment loss set by the Bank.
(i) Commitments Related to Credit Card Business
The Bank has entered into trademark license (membership) agreements with Master Card International Incorporated in 1993, VISA International
Service Association in 1988 and JCB International Service Association in 1997. The Bank pays and receives certain amounts of fees andcommissions in connection to the income and expense incurred pertaining to these agreements.
The Bank has entered into credit card affinity agreements with KDB Capital. Under the agreements, the Bank gives an allocation of the fee
income related to the credit card affinities.

(j) Asset Backed Securitization Related to Credit Card Business
Credit card receivables from cardholders provided to SPCs as of December 31, 2005 are summarized as follows:(In millions of Won)SPC
KEBCS Securitization 2002-7,
L.L.C. (the “SPC 7”)

Transferred(entrusted)amountAssets provided
Cash advances andrevolving purchases

403,804

Date oftransfer(entrusted)
2003.01.13

Remainingbalance
184,375

The Bank is responsible for possible delinquencies in the underlined assets of the SPCs and additional assets should be provided to the SPCs if
the remaining balances of the underlined assets fall below the stipulated amounts.
Additional assets which had been transferred or entrusted to the SPCs up to December 31, 2005 are summarized as follows:(In millions of Won)SPC
KEBCS Securitization 2002-7,
L.L.C. (the “SPC 7”)

Period2003.5.16~2004.7.30

Frequency

No. ofcardholders

8

125,874

Amount301,348

Type
Trust type

Assets which had been extracted from SPC and transferred back to or repurchased by the Bank up to December 31, 2005 are summarized asfollows:(In millions of Won)SPC
KEBCS Securitization 2002-7,
L.L.C. (the “SPC 7”)

Period2004.3.29~2005.4.11

Frequency
3

No. ofcardholders
104,514Amount158,739

Type
Written-off/
overdue loanAlso, profits from the SPC 7, net of the expenses of the Trust for each settlement period, are accounted for as interest income by the Bank.
The senior bonds and the subordinated bonds of the SPC 7th, amounting to 100,000 million and 50,500 million respectively, wewre repaid on
January 23, 2006, after the balance sheet date. The asset backed securitization contracts expired by recovering the trusted assets amounting to
187,362 million from the Kookmin Bank and the SPC 7th is in liquidation.

130

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004130131(k) Indemnification Obligations regarding the Share Subscription Agreement by and between the Bank and the LSFKEB Holdings, SCA
The Bank shall indemnify the LSF-KEB Holdings, SCA for all purchaser losses (*1) and pay for damages resulting from any breach by the Bank of
any of the Bank’s covenants (*2) in the Share Subscription Agreement. The Bank’s indemnification obligations are as follows:
Duration of Indemnification Obligations is as follows:- Purchaser losses, excluding those mentioned below, may be indemnified until 18 months following the Closing Date (*3).
- Purchaser losses arising as a result of fraud or intentional misrepresentation by the Bank may be indemnified at the Closing Date and continue
to be in full force and effect until three years following the Closing Date.
- Purchaser losses related to tax matters may be indemnified at the Closing Date and continue to be in full force an effect until five years
following the Closing Date.
The Bank’s indemnification obligations expire after the duration periods stated above. However, if the Bank receives written claims from Lone
Star before the expire of the durations, regardless of the durations stated above, the Bank’s indemnification obligations continue to be in force
and effect until the related matter are brought to satisfactory settlement.
The Bank has no indemnification obligation for claims less than 100 million. The Bank’s indemnification obligation applies to claims exceeding
15,000 million cumulative, and only losses exceeding 10,000 million may be indemnified.
The total amount of indemnification obligations cannot exceed the LSF-KEB Holdings, SCA’s investments in the Bank.
(*1) Purchase losses means the amount of any and all losses, costs, liabilities, damages, judgments, settlements and expenses that arise out of any breachby the Bank of any of the Bank’s representations and warranties contained in the Share Subscription Agreement or any breach by the Bank of any of theBank’s covenants or agreements in the Share Subscription Agreement.
(*2) Covenant means the conditions set forth in the Share Subscription Agreement that the Bank shall comply with the share subscription until the Closing
Date.
(*3) Closing Date means the date that the new shares come into effect, and falls on October 31, 2003.

(20) The Equity Linked Special Incentive
On July 15, 2005, the Bank granted the equity linked special incentive to employees for the purpose of motivation to improve a long-term result.
Aforementioned incentive is one time incentive which is linked with the Bank’s stock price and net asset per share, and can be eligible for the
incentive for three years after two years from the effective date. The Bank recognized 8,947 million as compensation expense for theaccomplishment over the long period related to above bonus and 8,943 million is recognized as long-term payables.

(21) Fees and Commissions
Fees and commissions for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Commissions received
Guarantee fees
Early termination penalty fees
Others2004
416,445
20,477120
116

514,194
24,110237
103437,158

538,644KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(22) Commission Charges
Commission charges for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Service fees
Others2004
193,091
17,901

226,302
13,905

210,992

240,207(23) General and Administrative Expenses
General and administrative expenses for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Salaries
Employee benefits
Provision for retirement and severance benefits
Depreciation
Amortization
Tax and dues
Rent
Entertainment
Advertising
Others132

2004
445,766
177,107
60,942
95,305
19,93538,884
38,637
13,53033,184
163,170418,512102,12255,990112,434
9,445
33,37837,95010,705
17,782
155,719

1,086,460

954,037

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

132
133

(24) Income Taxes(a) The Bank is subject to a number of income taxes based on taxable earnings which result in the following normal tax
rates:
Taxable earnings

Prior to 2005

Up to 100 million
Over 100 million

Thereafter
16.5%
29.7%

14.3%
27.5%

Effective in December 2003, the Korean government reduced the corporate income tax rate beginning in 2005. Specifically, effective from January
1, 2005, the income tax rate was reduced from 29.7% to 27.5%.

(b) The components of income tax expense (benefit) for the years ended December 31, 2005 and 2004 are summarized
as follows:(In millions of Won)
2005
Current
Change in deferred taxes
due to temporary differences
Change in deferred taxes
due to loss carry forward
Income taxes directly
applied to shareholders’ equity

2004
22,112

21,033(168,754)(262)(134,410)---(281,052)

20,771

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004(c) Details on adjustments for certain differences between amounts reported for financial accounting and income tax
purposes for the years ended for December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Temporarydifferences
Inclusion in gross revenue
and exclusion from loss
Allowance for guarantees
Interest not recognized in prior year
Valuation of trading securities
Valuation of available-for-sales
securities
Valuation of derivatives instrument
Other allowance for possible losses
Taxes and dues
OthersInclusion to loss
and exclusion from gross revenue
Allowance for guarantees in prior year
Overaccrued allowance
for loan losses in prior year
Interest not recognized
Valuation of securities
Valuation of held-to-maturities
Valuation of derivatives instrument
Debt-to-equity securities
converted in prior year
Present value discount
Dividend on securities
Gains from liabilities exempted
Taxes and dues
Others134

2004
Not temporary
differences

Temporarydifferences

Not temporary
differences

40,676
100,561
460,630-

18,982
161,874
605,979-

28,47742,285
236,673
116,829
1,026,131

21,70321,70337,5581,030,929
68,36826,6491,950,339

9,451
211,657
221,108

18,982-

54,200-114,307736,063
38,650--1,774,709
100,561
953,327
19,733
944,720-

179,120
8,443
114,372
1,209,937

4,421
294,201
7,017
305,639

14,747
11,401
152,808
4,026,206

2,431
16,174
7,923
26,528

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

134135(d) Details on deferred tax asset and liabilities and income taxes directly applied to shareholders’ equity are as follows:(In millions of Won)
AmountValuation of available-for-sales securities
Valuation of held-to-maturity securities
Unrealized loss on investment in affiliates
Capital adjustment of consolidated subsidiaries

1,939,744(926)(1,172)
5,048
1,942,694

Deferred tax assets
and liabilities

Income Taxes-(533,430)
255
322(1,388)(534,241)136

108,367

Valuation of derivatives

-

-

-

6,941
-

-

(*2) This amount was not set off with deferred tax liabilities because it was related with foreign branches and was different from others in tax authority.

4,640
7,681
(1,683)(23,500)
8,240(31,740)(34,408)270

127,469
401,936-

Total deferred tax liabilities
Deferred tax assets (foreign branches)
Decrease of deferred tax liabilities due to eliminate
the investment and stockholders’ equity
Deferred tax assets (Subsidiaries)
Deferred tax liabilities (Subsidiaries)
Set off amountDeferred tax assets as of Dec. 31, 2005 (*2)
Deferred tax liabilities as of Dec. 31, 2005

6,941

529,405--

463,525-

1,925,109

21,936(168,818)

298,073

247,526

1,461,584-

734

21,936(119,005)

79,768(613,883)

1,083,897

900,091

2,668(560,817)

126,022---31,027--

96,058-60,991

(856)

(146)

-

-

(560,817)-

79,768

-

(856)

(146)

(432,745)

458,260(2,039,334)

112,824

349,300--(3,112)(531)-

75,44449,258

124,702-274,343-

179,120

-

-

-

(414)
(141)

(414)

-

(141)

41,42929,801

41,429-29,801

15,0352,322(1,504)

11,1865,220

150,652--(31,434)(514)

11,186-(27,654)(3,928)10,050126,673

Dec.31. 2005

108,367

5,220

-

-

-

-

-

(1,504)

150,652--

40,676(31,434)-(1,513)

8,338

202,417

17,357-(27,654)(114,307)(2,290)6,318

126,673

11

(101)

824

54,673

8,443

40,676-(3,162)(14,285)

12,171

201,593

Jan.1. 2005(*1) This amount included additional retention resulted from tax adjustment after appropriation of prior period’s financial statements

Tax deduction

Loss carry-forward(100,561)(114,307)

18,982(5,503)(8,330)22,974

-

-

41

(367)

36,545

460,630

30,321

Dec.31. 2005

460,630

736,061

2,994(In millions of Won)
Deferred tax assets (liabilities)
Translation
adjustment
Increase
Decrease-

Valuation losses of securities

221,784(2,039,334)

OthersValuation gains of securities(3,112)(531)

453,463translation

Deferred loss foreign currency(foreign branches)

Deferred tax asset

Loans charged off(514)

63,116

Gain from trading of derivatives

18,982and acceptance(100,561)(11,499)

44,259733,067

Present Value discountAllowance for guarantees

Interest not recognizedHeld-to-maturity securities

Valuation gains of

Held-to-maturity securities

Valuation losses ofValuation of Securities

Jan.1. 2005(*1)

Temporary Diffreences
Translation
adjustment
Increase
Decrease(e) The changes in temporary differences, deferred tax assets and deferred tax liabilities are as follows:

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

136
137(f) The Bank expected deductible temporary differences (including the carry-forward of unused tax losses) could be
utilized by sufficient taxable temporary differences and future taxable income in the same period. Accordingly, theBank recognized a tax benefit in amount of 300,553 million which was reflected by changes of temporary differences
including unrecognized deferred tax assets till 2004.
(g) Change in Accounting Policy
Pursuant to SKAS No. 16 "Income Taxes” , effective January 1, 2005, deferred taxes are recognized on the temporary differences related tounrealized gains or losses on investment securities that are reported as separate component of capital adjustment. As a result of such change,
capital adjustment decreased by 534,241 million and deferred assets and liabilities increased by 577 million and 534,818 million,
respectively. These changes did not have any impact on the reported net income and prior year’s financial statements were not restated by SKAS
No. 16 "Income Taxes”.

(h) Expiration dates allowed for tax loss carry forwards held by the Bank in accordance with Korean corporate income
tax law to reduce the future taxable income are as follows:(In millions of Won)
Year incurredJan. 1, 2005

2000
2001
2004

712,269
75,3181,137,522
1,925,109

Deduction

Dec. 31, 2005

(712,269)(75,318)(673,997)(1,461,584)

Expiration

463,525
463,525

2005
2006
2009

(25) Earnings Per Share and Ordinary Earnings Per Share
Basic earnings per share and ordinary earnings per share for the years ended December 31, 2005 and 2004 are calculated as follows:(a) Earnings Per Share(In millions of Won)
2005
Net income
Preferred stock dividends
Net income allocated to common stock
Weighted average number of commonshares outstanding (in shares)

2004
1,933,891
1,933,891

526,635
526,635

644,906,826

643,939,890

2,999

818

Basic net earnings per share (in Won)(b) Basic Ordinary Earnings Per Share(In millions of Won)
2005

2004

Net income
Extraordinary gain
Extraordinary loss
Income tax related to extraordinary income
Ordinary income allocated to common stock
Weighted average number of commonshares outstanding (in shares)

1,933,891(16,690)
1,917,201

526,635(17,674)
508,961

644,906,826

643,939,890

Basic ordinary earnings per share (in Won)

2,973

790

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

Diluted earnings per shares and diluted ordinary earnings per share for the years ended December 31, 2005 and 2004 are calculated as follows:(c) Diluted Earnings Per Share(In millions of Won)
2005
Net income allocated to common stock
Compensation expense
associated with stock options
Preferred stock dividends
Diluted net income (loss)
Weighted average number of commonshares before diluted (in shares)
Diluted shares
Diluted weighted average number ofcommon shares outstanding (in shares)

2004
1,933,891

526,635100
1,933,991

526,635

644,906,826
346,625

643,939,890
143,322645,253,451

644,083,212

2,997

818

Diluted earnings per share (in Won)(d) Diluted Ordinary Earnings Per Share(In millions of Won)
2005
Ordinary income allocated to common stock
Extraordinary gain
Extraordinary loss
Income tax related to
extraordinary income
Diluted ordinary income (loss)
allocated to common stock
Weighted average number of commonshares before diluted (in shares)
Dilutive shares
Diluted weighted average number ofcommon shares outstanding (in shares)
Diluted ordinary income per share (in Won)

2004
1,933,991(16,690)-526,635(17,674)---

1,917,301

508,961

644,906,826
346,625

643,939,890
143,322645,253,451

644,083,212

2,971

790

(e) Potential common share information as of December 31, 2005 is as follows:(In millions of Won)

Stock options

138

Exercise period

Number of common share to be issued upon conversion

From March 26, 2003
to June 29, 2010

4,680,120

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

138
139

(26) Statements of Cash Flows
The Bank and subsidiaries consider cash on hand, deposits and highly liquid marketable securities with original maturities of three months orless to be cash and cash equivalents. Cash and cash equivalent as of December 31, 2005 and 2004 are as follows:(In millions of Won)2005
Cash on hand
Cash on hand in foreign currencies
Deposits in Won
Deposits in foreign currencies
Marketable securities

2004
1,396,406
263,604
473,103
990,147
170,311

1,266,966
242,356
415,996
863,9139,330

3,293,571

2,798,561

Significant non-cash flow transactions for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)2005
Decrease in loans by charge-off
Gain/loss on available-for-sale securities(capital adjustment)
Domestic exchange settlement

2004
588,761

2,894,081

804,818
3,402,976

323,0442,507,072

140

435,034

152,680

62,2992,523-

34,851

229,115340,648

1,695
19,594

9,908

2,837

1,999
1,641

910

4,125
932

14

459

12,917

2,939

15
1,999

-

925

Others

-

1,049

-

-

3,071
2,373
-

817

-

698

-

-

-

-

Commission charges in foreign currency

5,858

449
-

232

126
910

-

-

3,893
-

7

14

-

459

30,241

10,506
55
6,111

9,908

126
1,093

3,078

274
5,393

143
4,011

4

-

4,072

-

643

Commission charges in won

Interest expenses in foreign currency

Expenses:

Others

14,261

6,035

677
409

2,614

-

2,669

2,505

2,777

-

372

4

271

290

-

-

Fees and commissions

179,581

21

2,707

39,093

1,402

104,642

14,984
179,581-

4

38,873

1,091

-

-

6,937

2,025

-

-

34,851

Interest income in foreign currency

Interest income in Won

Revenues:

OthersBorrowings in foreign currency

54,807

73
6,818

-

-

16
-

15
2,688

220

555

42
456

-

-

Deposits in foreign currency

2,899

-

-

79,2435,000

84,12465,582851

47,554

Deposits in Won

Liabilities:

29,500355,445

152,680

-

-

-

5,000

352

-

-

73,331

81,52824,500-4,024
46,065

-

-

4,865

-

Total

-

Others

-

Trust

1,047

KEBFC

470

KEBD

2,126

KEBDAG--

Loans in Won

40,730

-

KEBC

851

KEBOC

47,554-

Others-in foreign currency
Loans in foreign currency

Due from banks

Assets:

KEBA(In millions of Won)

Significant transactions made in the normal course of business between the Bank and subsidiaries during the year ended December 31, 2005 and related account balances as of December
31, 2005 are summarized as follows:(27) Significant Transactions Between the Bank and Subsidiaries

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

456,857

172,771

1,907

16

629

Others

16

629
-

-

-

Commission charges in foreign currency

Commission charges in won

Interest expenses in foreign currency

Expenses:

12,025

-

3,259

1,707

286

3,677

1

-

4,946

960

4,402
-

3,259
-

1,481

286
206

-

2,677

3,471

1,490

203
23,500

1,707

-

9
-

57
2,638

14,811

949

1,359

-

-

-

-

1,506

6,460
15,0662,564

14,428

638

17

383

1,771

405,521

3,564
97,236

-

1

960

-

-

146
2,184

-

22

31

Others

-

-

-

1,359

1,506

978

-

-

-

22

311

-

-

1,060

-

-

-

31

-

Fees and commissions

Interest income in foreign currency

Interest income in Won

5,060

45,648

180,479

2,520

9,339

174,02982

213,205

1,312

97,236

61,593
Revenues:

4455

28,422-44,883151,075

2,026

146

82

OthersBorrowings in foreign currency
-

8,570

61,593

9,717
-

-

-

-

-

2,252

-

30
5,026

310

982

494

9,193

-

-

84,0155,000

82,69744,408-

9,535
96,330

335
5,428

-

-

1,907

5,000

-

-

38,621

443

167

-

334,196

167,008--

37,624-

Total

16,796

Others-Trust

78,051

4,200

40,041

-

KEBFC

7,770

KEBD

4,203

KEBDAG

-

-

-

KEBC

-

KEBIT

Deposits in foreign currency

1,024

65,035--626

10,84649,764

398

KEBOC

4,425

KEBA

Deposits in Won

Liabilities:

OthersLoans in Won

Loans in foreign currency

in foreign currency

Due from banks

Assets:(In millions of Won)

Significant transactions made in the normal course of business between the Bank and subsidiaries during the year ended December 31, 2004 and related account balances as of December
31, 2004 are summarized as follows:

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

140
141

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

Details of significant receivables and payables among subsidiaries as of December 31, 2005 are as follows:(In millions of Won)

Subsidiaries
KEBDAG
KEBFC
KEBC
KEBD
KEBFISKEBFC
KEBAKEBDAG

Account
Due from banks in foreign currencies
Deposits of insurance for retirement
and severance benefits
Deposits of insurance for retirement
and severance benefits
Due from banks in foreign currencies
Other asset
Other asset
Due from banks in foreign currencies
Other asset

AmountCounter party
subsidiary

Account

Amount

4,067

KEBA

Borrowings in foreign currencies

4,067

597

Trust

Deposit in Won

597

129
17
15
7
6
5

Trust
KEBDAG
Trust
Trust
KEBDAG
KEBA

Deposit in Won
Deposit in foreign currencies
Other liabilities
Other liabilities
Deposit in foreign currencies
Other liabilities

129
17
15
7
6
5

4,843

4,843

Details of significant transactions among subsidiaries for the year ended December 31, 2005 are as follows:(In millions of Won)

Subsidiaries
Trust
NYF
KEBOC
Trust
KEBA
LAF
Trust
KEBFC
KEBA
Trust
KEBDAG
LAF

Account
Commission charges in Won
Interest expenses in foreign currencies
Interest expenses in foreign currencies
Commission charges in Won
Interest expenses in foreign currencies
Interest expenses in foreign currencies
Interest expenses in Won
Commission charges in Won
Interest expenses in foreign currencies
Interest expenses in Won
Interest expenses in foreign currencies
Interest expenses in foreign currencies

Amount
390
191
64
63
55
9
8
8
5
2
1
1
797

142

Counter party
subsidiary
KEBFIS
KEBOC
NYF
KEBFC
KEBDAG
KEBOC
KEBFC
Trust
KEBDAG
KEBC
KEBD
NYF

Account
Fees and commissions in Won
Interest income in foreign currencies
Interest income in foreign currencies
Fees and commissions in Won
Interest income in foreign currencies
Interest income in foreign currencies
Interest income in Won
Fees and commissions in Won
Interest income in foreign currencies
Interest income in Won
Interest income in foreign currencies
Interest income in foreign currencies

Amount
390
191
64
63
55
9
8
8
5
2
1
1
797

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

142
143

(28) Added Value
The details of costs constituting value added expenses for the years ended December 31, 2005 and 2004 are as follows:(In millions of Won)
2005
Salaries
Employee benefit
Provision for severance benefits
Severance for early retirements
Depreciation
Amortization
Taxes and dues
Rent

2004
445,766
177,107
60,942
3,151
95,305
19,93538,884
38,637

418,512102,12255,99089,592
112,434
9,445
33,37837,950879,727

859,423

KOREA EXCHANGE BANK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(29) Merger with Korea Exchange Bank Credit Service
As decided at the Board of Directors’ meeting held on November 28, 2003, the Bank has determined to acquire Korea Exchange Bank Credit
Service Co., Ltd. (KEBCS) on February 28, 2004, in which the Bank has a 68.6% of ownership interest.
The Bank issued 0.533689 share of common stock of the Bank per the share of KEBCS to the KEBCS shareholders who were included in theshareholders list as of February 28, 2004, according to the merger agreement. The total number of shares distributed to such KEBCS
shareholders amounted to 5,981,895 shares.
Prior to acquisition of the remaining 31.4% of KEBCS, the Bank consolidated the financial statements of KEBCS and recorded a minority interestfor the portion not owned by the Bank. Due to the acquisition of remaining shares of KEBCS, the minority interest amounting to 35,445 million
was reflected to the accumulated deficit for 2005. The par value of common shares of the Bank was 29,909 million and reflected as a capitaladjustment.
KEBCS was initially established on May 19, 1988, in accordance with Credit Specialized Finance Business Act, as Korea Exchange Bank Credit
Card Co., Ltd. with the contribution from the Bank at with the objective to formulate a credit based society, provide convenient financial service forcustomers and further promote the domestic economic development. The name of Company was changed to KEBCS on January 1, 1992, and its
core business - credit card issuance, usage, and payment service - was extended to installment finance service through M&A with Korea
Exchange Bank Installment Finance Co., Ltd. on January 1, 1999. KEBCS was listed on Korea Stock Exchange on December 21, 2001.
As of December 31, 2003, KEBCS had 200 million (par value 5,000) of authorized shares and the paid-in capital amounts to 319,500 million(63,900 thousand shares of common stock, par value 5,000). As of February 28, 2004, the Bank was the largest shareholder of KEBCS andowned 43,838,938 shares amounting to 68.6% of total equity.
Total assets and liabilities of KEBCS as of February 28, 2004 were144

3,063,203 million and

3,982,986 million, respectively.

ORGANIZATION CHART
As of March 13, 2006

3 Banks
9 Groups
27 Departments
37 Divs. 101 Teams

General Meeting of Shareholders
Channel Development Committee
Compensation Committee
Board of Directors

Risk Management Committee
Audit Committee

Audit & Examination Div

Outside Director Candidate Recommendation Committee
President & CEO
Compliance Office
Legal Affairs Div.

Global Products Dept.

Corporate Group
GlobalCorporate
Bank

Int’l Dept.
World Corporate Group

Large Corporate Support Dept.
Global Markets Dept.

Retail BankPB Marketing Support Dept.

Card Bank
Special Credit Management Dept.
Credit Management
Card Credit Management Dept.

Finance
Human Resources
Communications

External Relations Dept.

Service Delivery

Service Delivery Dept.

Information & Technology
Business Process Development Dept.
Risk Management

144
145

BOARD OF DIRECTORS & MANAGING DIRECTORS

Board of Directors
Standing Directors

Robert E. Fallon

Richard F. Wacker

Jang, Myoung-Kee

ChairmanPresident & CEO

Deputy President & CCO

Ellis ShortPaul Yoo

Michael D. Thomson

Vice President, Lone Star

President, Lone Star Advisors Korea

General Counsel-Asia, Lone Star

Klaus M. Patig

Lee, Gyu

Park, Hyo-Min

Member of BOD, Commerzbank AG

Former Deputy President at KEXIM

Former General Manager of Currency Issue

Outside Directors

Dept. at BOK

Managing Directors

146

William H. Roelle

Kim, Hyoung-Min

Hyun, Yong-Goo

Senior Managing Director

Senior Managing Director

Managing Director

Kevin W. Kneebone

Lee, Nak-Keun

Suh, Choong-Suk

Managing Director

Managing Director

Managing Director

Jun, Dong-Yul

Noh, Chan

Yoon, Jong-Ho

Managing Director

Managing Director

Managing Director

Jhun, Joong-Gyu

Chun, Sung-Hun

Choi, Myung-Hee

Managing Director

General Counsel

AuditorGLOBAL DIRECTORY
as of March 31, 2006

Financial Institutions Division

Investment Banking Division

FX trading

Head of Financial Institutions :Chung, Chung-Won
Tel : 82-2-729-0432
Fax : 82-2-775-2565, 8323

Head of Investment Banking Division :Moon, Byung-Sung
Tel : 82-2-729-8882

Head of FX Dealing Team : Yang, Jin-Young
Tel : 82-2-729-0472

The Americas & Spain
Senior Manager : Yoon, Jong-Seon
Tel : 82-2-729-0448
Asia
Senior Manager : Kim, Sang-Sup
Tel : 82-2-729-8538
Western Europe & Africa
Senior Manager : Lee, Joo-Yun
Tel : 82-2-729-0464
Middle East, Eastern Europe & Germany
Manager : Choi, Sung-Ho
Tel : 82-2-729-0465
Oceania
Assistant Manager : Kim, Kyoung-Hyoun
Tel : 82-2-729-0456
Korean Banks
Senior Manager : Jung, Chang-Goo
Tel : 82-2-729-8916

Multi-national Corporate Division
General Manager : Kim, Dae-Hwan
Tel : 82-2-729-0266
German, Swiss, Denmark, Norway
Maketing Manager : Cho, Sung-Goo
Tel : 82-2-729-0291
USA I, Asia, U.K.
Maketing Manager : Han, Sang-Gwa
Tel : 82-2-729-0919
Europe II, USA II
Maketing Manager : Cho, Yong-Sung
Tel : 82-2-729-0920
FDI Consulting Desk
Senior Manager : Lee, Jae-Sung
Tel : 82-2-729-0288
Manager : Kim, Hyun-Sik
Tel : 82-2-729-0834
FDI Consultant : Kim, Sung-Won
Tel : 82-2-729-0285

P/F, S/F, M&A
Head of Dept Capital Market : Cho, In-Kyun
Tel : 82-2-729-0557

Chief Dealer : Lee, Sang-Bae
Tel : 82-2-729-0476
Chief Dealer : Lee, Kang-Kon
Tel : 82-2-729-8382

Project Finance
Chief Manager of Project Finance Team :Park, Seung-Kil
Tel : 82-2-729-0622

Chief Dealer : Koo, Kil-Mo
Tel : 82-2-729-0507

Structured Finance
Chief Manager of Structured Finance Team :Lee, Hoa-Sun
Tel : 82-2-729-0547

Treasury Division

M&A
Chief Manager of M&A Team :Stan S.H. Lee
Tel : 82-2-729-0082
C/F, SOC, R/E
Head of Corporate Finance/SOC/Real
Estate Team : Lee, Jae-Hak
Tel : 82-2-729-0292
Corporate Finance
Chief Manager of Corporate Finance Team :Park, Hyung-Kook
Tel : 82-2-729-0556
SOC
Chief Manager of SOC Team :Han, Sang-Han
Tel : 82-2-729-0542
Real Estate
Chief Manager of Real Estate Team :Choi, Yun-Hyun
Tel : 82-2-729-0546

General Manager : Lee, Hyung-Soo
Tel : 82-2-729-0531
Medium & Long-Term Financing
Head of Foreign Currency Treasury Team :Park, Jun-Sik
Tel : 82-2-729-0365
Senior Manager : Kim, Jee-Soo
Tel : 82-2-729-0520

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147

OVERSEAS NETWORK
as of March 31, 2006

BRANCHES &REPRESENTATIVEOFFICESAMERICAS
Panama Branch
General Manager : Seo, Gil-WeonCalle 50, Edificio Torre Global Bank Planta
Baja Apartado 8358, Panama 7, Panama
Tel : 507-269-9966
Fax : 507-264-4224
koexpa cwp.net.pa

EUROPE
London Branch
General manager : Ko, Youn-Wook
30 Old Jewry, London EC2R 8EB, U.K
Tel : 44-20-7606-0191
Fax : 44-20-7606-9968
gaf kebldn.co.uk
Paris Branch
General manager : Yoo, Jae-Hoo
17-19 Avenue Montaigne, 75008 Paris,
FranceTel : 33-1-5367-1200
Fax : 33-1-5367-1234
kebparis 9business.fr
Amsterdam Branch
General Manager : Kim, Hyo-Sang
Dr.Willem Dreesweg 2, 1185VB,
Amstelveen, The Netherlands
Tel : 31-20-546-9377
Fax: 31-20-546-9399
kebnl xs4all.nl

MIDDLE EAST ASIA
Bahrain Branch
General Manager : Oh, Chang-Han
5th Floor, Yateem Center Bldg., P.O. Box
5767, Manama, Bahrain
Tel : 973-17-229333
Fax: 973-17-225327
bahrain keb.co.kr

148

Dubai Representative Office
Chief Representative : Kim, Ki-Hyoung
Office No. 202 (BlockA) Concorde Complex
Bldg.,Plot 125-130, P.O.Box 14535, Dubai,
U.A.E
Tel : 971-4-2281133
Fax: 971-4-2281132
Arbil Branch
General Manager : Lee, Sang-Sik
ROK Army Camp,Arbil,Iraq
Tel : 82-2-723-4204
Fax: 82-2-723-4205
lkrock keb.co.kr

SOUTHEAST ASIA
Singapore Branch
General Manager : Yun, Ho-Sun
30 Cecil St., #24-03, 08 Prudential Tower
Singapore 049712
Tel : 65-6536-1633
Fax: 65-6538-2522
kebspore keb.co.kr
Manila Branch
General Manager : Jeon, Jong-Bai
33rd Floor, Citi Bank Tower 8741 Paseo deRoxas, St. Makati City Metro Manila,
Philippines
Tel : 63-2-848-1988
Fax: 63-2-848-1776
koexbank eastern.com.ph
Hanoi Branch
General Manager : Lee, In-Seok
14th Floor, Daeha Business Center 360
Kim Ma St., Ba Dinh Dist., Hanoi, Vietnam
Tel : 84-4-771-6800
Fax: 84-4-771-6784
keb.hanoi fpt.vn
Ho Chi Minh City Representative Office
General Manager : Lee, In-Seok
Unit 502,5th Floor, Diamond Plaza,34 Le
Duan St.Dist.1, Ho Chi Minh City,Vietnam
Tel : 84-8-827-4273
Fax: 84-8-827-4281

CHINA
Hong Kong Branch
General Manager : Sohn, Chang-Sup
32Fl., Far East Finance Centre, 16
Harcourt Road, Hong Kong, China
Tel : 852-2520-1221
Fax: 852-2861-2379
kebhk pacific.net.hk
Kowloon(Hong Kong Sub-Branch)
General Manager : Sohn, Chang-Sup
Room 803, Energy Plaza Bldg., 92
Grandville Road, Tsim Sha Tsui, East
Kowloon, Hong Kong, China
Tel : 852-2369-2131
Fax: 852-2311-0390
Beijing Branch
General Manager : Lee, Byung-Seok#510, Henderson Center, Office Tower 2,
18 Jianguomennei Avenue, Beijing 100005,
China
Tel : 8610-6518-3101
Fax: 8610-6518-3106
koexcnbj mx.cei.gov.cn
Tianjin Branch
General Manager : Lee, Kwang-Hyun
No.122 Astor Hotel, 33 Taierzhuang Road,
Tianjin 300040, China
Tel : 86-22-2319-2595
Fax: 86-22-2319-2594
kebcntj public.tpt.tj.cn
Dalian Branch
General Manager : Park, Tae-Hyeong
25th Fl., World Trade Center,No.25
Tongxing Road, Zhongshan District,
Dalian,China
Tel : 86411-8253-1988
Fax: 86411-8281-6150
kebdlcn mail.dlptt.ln.cn
Shanghai Branch
General Manager : Jeong,Sang-Hyeon
17f Pufa Tower, No 588 Pudong South
Road, Pudong New District,Shanghai
200120, China
Tel : 86-21-5882-5998
Fax: 86-21-5882-8743
kebcnsh mail.online.sh.cn

DOMESTIC NETWORK
as of March 31, 2006

JAPANTokyo Branch
General Manager : Lee, Suk-Hoon
The Shin Kokusai Bldg., 4-1, Marunouchi,
3-Chome, Chiyoda-ku, Tokyo, Japan
Tel : 81-3-3216-3561
Fax: 81-3-3214-4491
kebtkcom cb.mbn.or.jp
Osaka Branch
General Manager : Cho, Jeong-Haeng
Namba Plaza Bldg., 5-7, Motomachi 1chome, Naniwa-ku, Osaka, Japan
Tel : 81-6-6630-2600
Fax: 81-6-6630-2806
kebosaka helen.ocn.ne.jp

SUBSIDIARIESKEB NY Financial Corp.
Preasident : Min, Young-Soo
460 Park Ave. 14th Floor, New York,
N.Y.10022 U.S.A
Tel : 1-212-838-4949
Fax: 1-212-371-5290
kebny kebus.com
KEB USA International Corp.
President : Shin, Dong-Hun
460 Park Ave. 15th Floor, New York,
N.Y.10022 U.S.A.
Tel : 1-212-838-4949
Fax: 1-212-752-8551

KEB Australia Ltd.
Managing Director : Oh, Hee-Cheon
Suite 602, Level 6, AIG Building 220 George
St., Sydney N.S.W.2000, Australia P.O.Box
N595 Grosvenor Place NSW 1220
Tel : 61-2-9251-3355
Fax: 61-2-9251-3853
admin keba.com.au

HEAD OFFICE

Korea Exchange Bank (Deutschland) A.G.
Managing Director : Lee, Jae-Cheol
Bockenheimer Landstrasse 51-53, 60325
Frankfurt/M Germany
Tel : 49-69-7129-0
Fax: 49-69-7129-122
mail koexbank.de

KEB Capital Inc.
President : Nam, Young-Jin
10F Hanwi Building, 70 Da-dong, Jung-gu,
Seoul 100-180, Korea
Tel : 82-2-3708-2100
Fax : 82-2-756-5269

PT Bank KEB Indonesia
Managing Director : Min, Hyung-Sik
Wisma GKBI 12th Fl., Suite 1201 Jalan
Jenderal Sudirman No.28 P.O. Box 2317
Jakarta 10210 Indonesia
Tel : 6221-574-1030
Fax: 6221-574-1031
kebd cbn.net.id
Banco KEB do Brasil S.A.
President : Hwang, Sun-Gap
Av.Doutor Chucri Zaidan 940, Torre II,
18 Andar, CEP 04583-110, Vila Cordeiro,
Sao Paulo, SP, Brasil
Tel : 55-11-5188-1122
Fax: 55-11-5188-1120
kebsp sagesse.com.br

181, Euljiro 2-ga, Jung-gu, C.P.O.Box 2924,
Seoul 100-793, Korea
Tel : 82-1544-3000
Tlx : K23141

SUBSIDIARIESKEB Futures Co.,Ltd.
President : Min, Seung-Ki
11F Yuhwa Building, 23-7 Youido-dong,
Youngdungpo-gu, Seoul 150-738, Korea
Tel : 82-2-3770-4100
Fax : 82-2-3770-4147
KEB Investor’s Service Co.,Ltd.
President : An, Joong-Seok
23F KEB Head Office, 181 Euljiro 2-ga,
Jung-gu, Seoul 100-793, Korea
Tel : 82-2-729-0447
Fax: 82-2-777-5311

CORPORATE DATA
as of December 31, 2005
Established : January 30, 1967

KEB LA Financial Corp.
President : Kim, Yong-Koo
777 South Figueroa Street, Suite 3000,
Los Angeles, CA.90017 U.S.A
Tel : 1-213-683-0830
Fax: 1-213-622-5378
kebla kebus.com
Korea Exchange Bank of Canada (H.O.)
President : Choi, Yoon-Chul
Madison Centre Suite 1101, 4950 Yonge St.
Toronto Ontario M2N 6K1, Canada
Tel : 1-416-222-5200
Fax: 1-416-222-5822
keboc interlog.com

Paid-In Capital : KRW3,224,534 Million
Total Issued & Outstanding Stocks :644,906,826
Stock Exchange Listing :Korea Stock Exchange (KSE)

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149

181, Euljiro 2-ga, Jung-gu, C.P.O. Box 2924, Seoul 100-793, Korea
Tel : 82-1544-3000 SWIFT : KOEXKRSE Telex : K23141
http://www.keb.co.kr