Standard Chartered First Bank Korea Limited€¦ · Standard Chartered First Bank Korea Limited...

Standard Chartered First Bank Korea Limited Trust Accounts Financial Statements December 31, 2007 and 2006 (With Independent Auditors’ Report Thereon)

Independent Auditors' Report

Based on a report originally issued in Korean The Board of Directors and Trust Beneficiaries of Standard Chartered First Bank Korea Limited Trust Accounts: We have audited the accompanying balance sheets of Standard Chartered First Bank Korea Limited Trust Accounts (the “Trusts”) as of December 31, 2007 and 2006, and the related statements of income and cash flows for the years then ended. These financial statements are the responsibility of management of Standard Chartered First Bank Korea Limited. 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 plan and 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 the accounting 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 financial statements referred to above present fairly, in all material respects, the financial position of the Trusts as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with the Korean Trust Business Act, related regulations and accounting principles generally accepted in the Republic of Korea. Without qualifying our opinion, we draw attention to the following: As discussed on note (2) to the financial statements, accounting principles and auditing standards and their application in practice vary among countries. The accompanying 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 those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable about Korean accounting principles and auditing standards and their application in practice. KPMG Samjong Accounting Corp. Seoul, Korea March 7, 2008 This report is effective as of March 7, 2008, 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 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.

Standard Chartered First Bank Korea Limited Trust Accounts

Balance Sheets

December 31, 2007 and 2006

(In millions of Won)

2007 2006 Assets Securities (notes 4 and 5) W 535,598 667,270 Loans (note 5) 78,848 84,801 Private corporate bonds (notes 4 and 5) - 1,656 Allowance for loan and security losses (note 5) (18) (500) Entrusted accounts receivable 1,539,602 1,135,202 Movable property and real estate 1,133,097 1,203,684 Due from the Bank Account (note 2) 86,701 89,895 Accrued income 23,316 24,808 Other assets 889 708 W 3,398,033 3,207,524 Liabilities Money trusts (note 1) W 679,261 811,795 Property trusts (note 1) 2,694,199 2,367,346 Other liabilities 11,558 16,262 Reserve for future trust losses 13,015 12,121 W 3,398,033 3,207,524 See accompanying notes to financial statements.


Statements of Income

Years ended December 31, 2007 and 2006


2007 2006 Revenues Interest on deposits W 10 11 Interest on securities 28,933 34,129 Interest on loans 3,819 2,621 Interest on call loans - 32 Interest on private corporate bonds 8 1,752 Interest on due from the Bank Account 3,615 3,110 Gain on security valuation and transactions 4,554 5,801 Reversal of reserve for future trust losses 271 1,822 Reversal of allowance for loan and security losses 33 874 Other income 841 620 W 42,084 50,772 Expenses Trust fees to the Bank Account W 5,979 8,824 Loss on security valuation and transactions 2,600 5,550 Provision for future trust losses 1,165 1,398 Other expenses 869 906 10,613 16,678 Dividends of trust profit to beneficiaries W 31,471 34,094 See accompanying notes to financial statements.


Statements of Cash Flows

Years ended December 31, 2007 and 2006

(In millions of Won) 2007 2006 Cash flows from operating activities: Gain on security valuation, net W (2,144) (821) Other, net 894 (424) Changes in operating assets and liabilities, net 130,758 (23,773)

Net cash provided by (used in) operating activities 129,508 (25,018)

Cash flows from investment activities:

Decrease (increase) in entrusted accounts receivable (312) 573

Net cash provided by (used in) investment activities (312) 573 Cash flows from financing activities: Increase (decrease) in money trusts (132,534) 3,466 Other, net 144 (753)

Net cash provided by (used in) financing activities (132,390) 2,713 Net decrease in cash equivalents (3,194) (21,732) Cash equivalents at beginning of year 89,895 111,627 Cash equivalents at end of year W 86,701 89,895 See accompanying notes to financial statements.

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Notes to Financial Statements


(In millions of Won) (1) Trust Accounts

(a) Money Trusts

Key characteristics of each trust within Standard Chartered First Bank Korea Limited (the “Bank”)’s money trust accounts are as follows:

Contract Type Type period of dividend of principal

General Unspecified Money Trust 1 year or greater Guaranteed Guaranteed Reserving Objective Money Trust 1 year or greater Guaranteed Guaranteed (Guaranteed) Reserving Objective Money Trust 1.5 years or greater Performance Based Mixed (*) (Performance based) House Money Trust 1.5 years Performance Based Mixed (*) Development Trust 2 years or 3years Guaranteed Guaranteed Old Age Pension Trust 5 years or greater Performance Based Guaranteed Business Money Trust 1.5 years Performance Based Mixed (*) National Stock Trust 3 years or greater Performance Based Non-Guaranteed Personal Pension Trust 15 years or greater Performance Based Guaranteed Long-Term House Trust 3~5 years Performance Based Non-Guaranteed Workers Preferential Trust 3~5 years Performance Based Non-Guaranteed New Reserving Trust 1.5 years or greater Performance Based Non-Guaranteed Retirement Trust Until the maturity Performance Based Guaranteed Specified Money Trust as per contract Performance Based Non-Guaranteed Open Type Money Trust 1 year Performance Based Non-Guaranteed New Personal Pension Trust 15 years or greater Performance Based Guaranteed Pension Trust 15 years or greater Performance Based Guaranteed

(*) Mixed: principal guaranteed for certain trust beneficiaries

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Notes to Financial Statements, Continued


(In millions of Won) (1) Trust Accounts, Continued

(b) Property Trusts

Property trusts are created when non-cash assets are given to the Bank as a Trustee. As the Trustee, the Bank manages three property trusts as of December 31, 2007: Securities Trust, Accounts Receivable Trust and Movable Property and Real Estate Trust. The Securities Trust is a trust in which the Trustee manages and operates the securities that are government and public bonds, debentures, equity securities and etc., and distributes the principal and dividends to the Truster at the point of settling such trust. The Bank does not guarantee the principal and dividends payments on beneficiary certificates issued by such trust. The Accounts Receivable Trust is a trust in which the Trustee collects, manages and disposes of the accounts receivable, and distributes the income to the Truster. The Bank does not guarantee the principal and dividends payments on beneficiary certificates issued by such trust. The Movable Property and Real Estate Trust is a collateralized trust in which the Truster deposits property to guarantee the performance of his liabilities and responsibilities. The Trustee preserves the ownership right and collateral value, and disposes of the entrusted property to settle the trust for the Beneficiary when the Truster does not perform as promised. The Bank does not guarantee the principal and dividends payments on beneficiary certificates issued by such trust.

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(In millions of Won) (2) Summary of Significant Accounting Policies

Under the Korean Trust Business Act, trust accounts held by the Bank are accounted for and reported separately from the Bank’s own financial statements. The significant accounting policies applied in the preparation of the accompanying financial statements of the Bank’s trust accounts are summarized as follows:

(a) Basis of Presenting Financial Statements

The Trust maintains its accounting records in Korean Won and prepares its statutory financial statements in the Korean language in conformity with the Korean Trust Business Act, related regulations and accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Trust 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 financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been condensed, restructured and translated into English from the Korean language financial statements. Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Trust’s financial position, results of operations and cash flows, is not presented in the accompanying financial statements.

(b) Equity Securities Listed equity securities, including those registered in secondary markets such as KOSDAQ, are valued at market value. Unlisted equity securities are carried at cost. Equity securities held in the Specified Money Trust are recorded at acquisition cost until termination, when they are then valued at market value.

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(In millions of Won) (2) Summary of Significant Accounting Policies, Continued

(c) Debt Securities Listed debt securities, for which market prices were quoted for more than 10 days a month during the consecutive three months prior to the period end, are valued at the closing market price as of the valuation date. However, unlisted debt securities are valued using an average of yields for bonds announced by external rating agencies. The adjustments on yields reflect remaining time, credit risk, and current interest rates. Debt securities for which adjustment yields cannot be applied are valued at fair value as calculated by the Trust’s valuation committee. In accordance with Korean Trust Business Supervisory Regulations, debt securities in non-specified money trusts established prior to November 15, 1998 are recorded at cost plus accrued interest. The Trust calculates an allowance for losses on those debt securities, except for those issued by the Korean government and local governments, based on the issuers’ future debt service capacity using the same credit rating and the Financial Supervisory Service (the “FSS”)’s minimum loan loss reserve percentages as it uses for corporate loans (see “Allowance for Loans and Securities Losses” below). Provisions are determined by applying the following percentages to the various credit ratings: Normal 0% (0.5% for the trusts for which dividends are guaranteed) or above, Precautionary 2% or above, Substandard 20% or above, Doubtful 50% or above, and Estimated loss 100%. Debt securities held in the Specified Money Trust are recorded at acquisition cost until termination, when they are then valued by market prices or adjustment on yields as previously described.

(d) Beneficiary Certificates Beneficiary certificates are valued at the standard price announced by the issuing company as of the valuation date. Beneficiary certificates in the Specified Money Trust are recorded at acquisition cost until termination, when they are then valued at the standard price announced by the issuing company.

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(e) Allowance for Loans and Securities Losses

The Trust calculates the allowance for losses of corporate loans and certain debt securities based on borrowers’ future debt service capacity (“Forward Looking Criteria (FLC)”). This credit rating model includes financial and non-financial factors of borrowers. Household loans are classified based on the number of delinquent days, value of collateral and reasonably estimated collectibility. The Trust does not recognize an allowance for losses of trust asset held in the Specified Money Trust. Provisions are determined by applying the following minimum percentages to the various credit ratings: Credit ratings Loan classifications Provision percentages 1 ~ 6 Normal 0% (0.5%*) or above 7 Precautionary 2% or above 8 Substandard 20% or above 9 Doubtful 50% or above 10 Estimated loss 100%

(*) 0.5% for trusts in which dividends are guaranteed Loans which are deemed uncollectible are fully reserved by the allowance. However, charge-offs of loan balances may be delayed due to certain banking regulations governing actual charge-offs of loan balances.

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(f) Present Value Discounts

If the present value of a loan is different from its book value, due to a rescheduling of terms as agreed by the related parties (as in the case of court receivership, court mediation or workout), the difference between present value and book value of the loan is recorded as an allowance for loan losses and is amortized to current earnings over the related period using the effective interest rate method. The amount amortized is included interest income.

(g) Due from the Bank Account The Trust makes certain loans to the Bank for short-term cash management purposes. These are recorded as due from the Bank Account by the Trust. These amounts are considered as cash equivalents on the statements of cash flows.

(h) Recognition of Interest Income Interest income on loans and securities is recognized on an accrual basis, while interest income on overdue and dishonored loans or securities, except for those secured or guaranteed by other financial institutions, is recognized on a cash basis. Interest income on overdue and dishonored loans or securities, which is not recognized, amounted to W1 million and W33 million as of December 31, 2007 and 2006, respectively.

(i) Income Taxes The Trust does not have any tax liability for income resulting from operations. However, when paying trust profits to beneficiaries, the Trust is responsible for withholding appropriate taxes.

(j) Compensation from the Bank

Certain money trust agreements provide that the Bank guarantees a principal amount of trust deposits or principal plus a guaranteed rate of return. In relation to such guarantees, the Trust is required to set up a special reserve equal to 25% or more of trust fees until the total reserve equal to 5% of the related money trust balance. If income from trust operations is insufficient to generate the guaranteed rate of return, the deficiency will be recovered from previously established special reserves and trust fees paid to the Bank, and then compensated by the Bank if special reserves or previously paid fees are insufficient.

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(k) Calculation of Trust Profits

Trust profits are calculated under one of the three following methods depending on the trust agreements: yield calculation method, closing method, and standard price method. Under the yield calculation method, trust profits are calculated using the following formulas: Trust profits = Trust deposit balance × Average yield rate

1) Allowance for loan anoutstanding interest b

2) Daily profit calculated

Trust profits, net of withhat termination) distributed Under the closing methodat the designated date. Under the standard pricecalculated daily as follows Standard price = Net asse

* Average yield rate =

* Daily yield rate =

Accumulated daily yield rates for a calculation period

Number of days

d securities losses and reserve for future trust losses are deducted from earing asset balance when calculating the daily yield rate.

= Interest revenue ± Realized gain (loss) from securities transactions - Provision for loan and securities losses - Other expenses

olding taxes, are periodically (every six months or one and a half years, or to Trusters by adding to the Trusters’ principal balance.

, trust profits are calculated by closing the books at the date of maturity or

method, Trusters are entitled to the standard price per share which is :

ts ÷ Total number of shares of each trust

Daily profit calculated 2)

ㅡ Predetermined trust management fee rate

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(l) Trust Fees to the Bank Account

The Bank receives trust fees from the trust accounts for its management of trust assets and operations and is entitled to receive special trust fees from certain trust accounts in accordance with relevant laws and regulations applicable to trust operations.

(m) Securities Investment Trusts Business of Trustee Company is that managing and keeping the investment trust property in custody, acquiring and disposing of assets, paying the price for repurchasing beneficial securities and paying profits, overseeing instructions, etc. in accordance with the Truster's instructions, as well as entering into a trust contract prescribing that the Asset Management Company under Act on business of operating indirect investment and assets shall be the Truster, and the bank shall be the trustee. Trust remunerations which shall be governed by the terms and conditions of trust are main incomes of Trustee Company.

(3) Classification of Trust Accounts

Assets and liabilities of trust accounts as of December 31, 2007 and 2006 were classified into principal or dividends guaranteed trusts, mixed guaranteed trusts, and non-guaranteed trusts as follows:

Principal or dividends Mixed Non- guaranteed guaranteed guaranteed Total December 31, 2007 Securities W 253,502 4,303 277,793 535,598 Loans 78,819 28 1 78,848

Entrusted accounts receivable - - 1,539,602 1,539,602 Movable property and real estate - - 1,133,097 1,133,097 Accrued income and other assets 14,905 138 9,162 24,205 Due from the Bank Account 66,642 8,052 12,007 86,701

Allowance for loan and security losses - (12) (6) (18) Total assets W 413,868 12,509 2,971,656 3,398,033 Money trusts W 397,797 11,994 269,470 679,261 Property trusts - - 2,694,199 2,694,199

Other liabilities 3,421 150 7,987 11,558 Reserve for future trust losses 12,650 365 - 13,015

Total liabilities W 413,868 12,509 2,971,656 3,398,033

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(In millions of Won) (3) Classification of Trust Accounts, Continued

Principal or dividends Mixed Non- guaranteed guaranteed guaranteed Total December 31, 2006 Securities W 278,458 5,577 383,235 667,270 Loans 84,562 88 151 84,801 Private corporate bonds - - 1,656 1,656 Entrusted accounts receivable - - 1,135,202 1,135,202 Movable property and real estate - - 1,203,684 1,203,684 Accrued income and other assets 15,089 534 9,893 25,516 Due from the Bank Account 50,914 9,128 29,853 89,895

Allowance for loan and security losses - (11) (489) (500) Total assets W 429,023 15,316 2,763,185 3,207,524 Money trusts W 414,602 14,688 382,505 811,795 Property trusts - - 2,367,346 2,367,346

Other liabilities 2,736 192 13,334 16,262 Reserve for future trust losses 11,685 436 - 12,121

Total liabilities W 429,023 15,316 2,763,185 3,207,524

General Unspecified Money Trust, Reserving Objective Money Trust (Guaranteed), Development Trust, Old Age Pension Trust, Personal Pension Trust, Retirement Trust, New Personal Pension Trust and Pension Trust are classified as principal or dividends guaranteed trusts. Mixed guaranteed trusts represent trusts for which principal is guaranteed only for certain beneficiaries who entered into the trust agreements prior to May 1, 1996. House Money Trust, Business Money Trust and Reserving Objective Money Trust (Performance) are classified as mixed guaranteed trusts. National Stock Trust, Long-Term House Trust, Workers Preferential Trust, New Reserving Trust, Specified Money Trust, Open Type Money Trust and Property Trusts are classified as non-guaranteed trusts.

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(In millions of Won) (4) Securities

(a) Equity Securities

Equity securities as of December 31, 2007 and 2006 were as follows: Number Acquisition Book of shares cost(*2) value

December 31, 2007 Woori Finance Holdings Co., Ltd.(*1) 2,417,472 W 13,006 13,006 Samsung Life Insurance Co. (*1) 1,200,000 6,000 6,000 Doosan Corp. 811,082 6,000 6,000 DPC Co., Ltd. 1,055,970 2,496 2,496 Kyung Nong Corp. 1,287,100 1,499 1,499 Taeyang Metal Industrial Co., Ltd. 110,800 494 494 Korea Express Co., Ltd. 2,500 20 20

POSCO 30 5 5 Hyundai Motor Co., Ltd. 100 5 5

Samsung Electronics Co., Ltd. 10 5 5 Others 727 34 34

6,885,791 W 29,564 29,564

December 31, 2006

Doosan Corp. 811,082 W 6,000 6,000 DPC Co., Ltd. 1,055,970 2,496 2,496 Korea Logistics Network Corp. 206,393 1,640 1,640 Kyung Nong Corp. 643,550 1,499 1,499

Taeyang Metal Industrial Co., Ltd. 110,800 494 494 Korea Express Co., Ltd 2,500 20 20

POSCO 30 5 5 Hyundai Motor Co., Ltd. 100 5 5

Samsung Electronics Co., Ltd. 10 5 5 Others 739 34 34

2,831,174 W 12,198 12,198

(*1) Equity securities held in the Securities Trust of Property Trusts were recorded at acquisition cost. (*2) Equity securities held in the Specified Money Trust except for equity securities noted in (*1)

were recorded at acquisition cost.

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(4) Securities, Continued

(b) Debt Securities

Debt securities as of December 31, 2007 and 2006 were as follows: Face Acquisition Book value cost value

December 31, 2007 Government bonds Korea treasury bonds W 70,000 69,158 69,181 Korea housing bonds 211,032 200,480 202,601 281,032 269,638 271,782 Financial debentures Monetary stabilization bonds 40,000 38,424 38,411 40,000 38,424 38,411 Local government bonds 1,158 1,121 1,133 Corporate bonds 5,998 5,891 5,891 W 328,188 315,074 317,217 December 31, 2006 Government bonds Korea treasury bonds W 65,000 65,529 65,049 Korea housing bonds 209,439 198,535 200,169 Foreign exchange stabilization bonds 10,000 10,324 10,090 284,439 274,388 275,308 Financial debentures Monetary stabilization bonds 29,800 29,702 29,780 Others 1,000 959 959

30,800 30,661 30,739 Local government bonds 20,678 20,292 20,557 Corporate bonds 40,603 41,306 40,864 W 376,520 366,647 367,468

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(In millions of Won) (4) Securities, Continued

(c) Debt Securities, Denominated in Foreign Currency

Debt securities, denominated in foreign currency, as of December 31, 2007 and 2006 were as follows:

Face Acquisition Book

value cost(*) value

Government bonds Foreign exchange stabilization bonds December 31, 2007 W 18,633 21,705 21,705 December 31, 2006 W 18,633 21,705 21,705 (*) Debt securities in foreign currency held in the Specified Money Trust were recorded at acquisition

cost.

(d) Bills Bought

Bills bought as of December 31, 2007 and 2006 were as follows:

Face Acquisition Book value cost value

December 31, 2007 Commercial papers W 108,151 108,151 108,151 December 31, 2006 Bills issued W 482 482 482 Commercial papers 199,107 199,107 199,107 W 199,589 199,589 199,589

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(In millions of Won) (4) Securities, Continued

(e) Other Securities Other securities as of December 31, 2007 and 2006 were as follows:

Acquisition cost(*) Book value

December 31, 2007 Beneficiary certificates of bond type trusts W 10,000 10,000 Others 48,961 48,961

W 58,961 58,961

December 31, 2006 Beneficiary certificates of bond type trusts W 10,000 10,000 Others 56,310 56,310

W 66,310 66,310

(*) Other securities held in the Specified Money Trust were recorded at cost acquisition.

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(In millions of Won) (5) Asset Classification and Allowance for Loan and Security Losses

The classification of loans and securities as of December 31, 2007 and 2006 were as follows: Estimated Normal Precautionary Substandard Doubtful loss Total December 31, 2007 Loans W 78,847 - 1 - - 78,848 Corporate bonds 5,393 498 - - - 5,891 Bills bought 92,917 14,162 1,072 - - 108,151 W 177,157 14,660 1,073 - - 192,890 December 31, 2006 Loans W 84,798 - 3 - - 84,801 Corporate bonds 28,882 9,982 - 2,000 - 40,864 Private corporate bonds - 1,150 - 506 - 1,656 Bills bought 158,995 39,040 1,072 - 482 199,589 W 272,675 50,172 1,075 2,506 482 326,910

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(In millions of Won) (5) Asset Classification and Allowance for Loan and Security Losses, Continued

Specified Money Trust assets were excluded from recording an allowance for loan and security losses and are maintained at book value in accordance with Korean Trust Business Supervisory Regulations. Details of Specified Money Trust assets as of December 31, 2007 and 2006 were as follows: Estimated Normal Precautionary Substandard Doubtful loss Total December 31, 2007 Corporate bonds W 5,393 498 - - - 5,891 Bills bought 92,917 14,162 1,072 - - 108,151 W 98,310 14,660 1,072 - - 114,042 December 31, 2006 Corporate bonds W 8,640 9,982 - 2,000 - 20,622 Private corporate bonds - 1,150 - 506 - 1,656 Bills bought 158,995 39,040 1,072 - - 199,107 W 167,635 50,172 1,072 2,506 - 221,385

The allowance for loan and security losses as of December 31, 2007 and 2006 were as follows: Principal or dividends Mixed Non- guaranteed guaranteed guaranteed Total

December 31, 2007 W - 12 6 18 December 31, 2006 W - 11 489 500

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(In millions of Won) (6) Restructured Securities

Restructured Securities as of December 31, 2007 and 2006 were summarized as follows:

2007 2006 Corporations under liquidation

Balance before restructuring(*1) W 3,057 2,827 Debt to equity swap - 20 Debt securities 498 - Commercial papers 2,559 2,807 Balance at year end 3,057 2,827 Loss from restructuring securities W - -

(*1) Balance before restructuring was held in the Specified Money Trust.

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