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Financial Risk Management

12 Months Ended

Dec. 31, 2022

Text block [abstract]

Financial Risk Management

37. Financial Risk Management

(1) Financial Risk Factors

The Group’s activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures such as cash flow risk.

The Group’s financial policy is set up in the long-term perspective and annually reported to the Board of Directors. The financial risk management is carried out by the Value Management Office, which identifies, evaluates and hedges financial risks. The treasury department in the Value Management Office considers various finance market conditions to estimate the effect from the market changes.

1) Market risk

The Group’s market risk management focuses on controlling the extent of exposure to the risk in order to minimize revenue volatility. Market risk is a risk that decreases value or profit of the Group’s portfolio due to changes in market interest rate, foreign exchange rate and other factors.

(i) Sensitivity analysis

Sensitivity analysis is performed for each type of market risk to which the Group is exposed. Reasonably possible changes in the relevant risk variable such as prevailing market interest rates,

currency rates, equity prices or commodity prices are estimated and if the rate of change in the underlying risk variable is stable, the Group does not alter the chosen reasonably possible change in the risk variable. The reasonably possible change does not include remote or ‘worst case’ scenarios or ‘stress tests’.

(ii) Foreign exchange risk

The Group is exposed to foreign exchange risk arising from operating, investing and financing activities. Foreign exchange risk is managed within the range of the possible effect on the Group’s cash flows. Foreign exchange risk (i.e. foreign currency translation of overseas operating assets and liabilities) unaffecting the Group’s cash flows is not hedged but can be hedged at a particular situation.

As at December 31, 2020, 2021 and 2022, if the foreign exchange rate had strengthened/weakened by 10% with all other variables held constant, the effects on profit before income tax and shareholders’ equity would have been as follows:

(in millions of Korean won)		Fluctuation of foreign exchange rate		Impact on profit before income tax 1				Impact on equity
2020.12.31		10%		￦	25,220			￦	36,961
		-10%			(25,220	)			(36,961	)
2021.12.31		10%		￦	(3,433	)		￦	8,692
		-10%			3,433				(8,692	)
2022.12.31		10%		￦	(5,841	)		￦	(15,836	)
		-10%			5,841				15,836

1 Computed with considering derivatives hedging effect applied by the Group to hedge foreign exchange risk of liabilities in foreign currencies.

The above analysis is a simple sensitivity analysis which assumes that all the variables other than foreign exchange rates are held constant. Therefore, the analysis does not reflect any correlation between foreign exchange rates and other variables, nor the management’s decision to decrease the risk.

Details of financial assets and liabilities in foreign currencies as at December 31, 2020, 2021 and 2022, are as follows:

(In thousands of foreign currencies)		2020								2021								2022
		Financial assets				Financial liabilities				Financial assets				Financial liabilities				Financial assets				Financial liabilities
USD			400,046				1,937,935				245,759				2,302,642				106,426				2,336,607
SDR1			255				728				255				722				255				722
JPY			209,376				46,000,009				29,227				30,000,763				32,801				400,002
GBP			—				—				—				1,005				30				83
EUR			316				162				3,943				10,801				185				7,832
CNY			458				491				—				—				—				—
RWF2			646				—				586				—				15,521				13,025
THB3			535				—				2,160				—				265				—
MMK4			—				—				—				—				—				—
TZS5			1,019				—				1,644				—				1,464				—
BWP6			212				—				93				—				183				—
HKD7			—				198				—				105				37				—
BDT8			—				—				—				—				—				—
PLN9			26				—				—				—				—				—
VND10			242,370				—				257,895				—				280,226				—
XAF11			16,229				—				—				—				—				—
SGD12			6				284,000				13				284,000				448				284,000
TWD13			—				—				—				226				—				—
CHF14			—				—				—				161				—				—
MYR15			—				—				—				—				1				—
BGN16			—				—				—				—				62				—

1 Special Drawing Rights.

2 Rwanda Franc.

3 Thailand Bhat.

4 Myanmar Kyat.

5 Tanzanian Shilling.

6 Botswana Pula.

7 Hong Kong Dollar.

8 Bangladesh Taka.

9 Polish Zloty.

10 Vietnam Dong.

11 Central African Franc.

12 Singapore Dollar.

13 Taiwan Dollar.

14 Swiss Franc.

15 Ringgit Malaysia.

16 Bulgarian Lev.

(iii) Price risk

As at December 31, 2020, 2021 and 2022, the Group is exposed to equity securities price risk because the securities held by the Group are traded in active markets. If the market prices had

increased/decreased by 10% with all other variables held constant, the effects on profit before income tax and equity would have been as follows:

(in millions of Korean won)		Fluctuation of price		Impact on profit before income tax				Impact on equity
2020.12.31		10%		￦	2,811			￦	3,472
		-10%			(2,811	)			(3,472	)
2021.12.31		10%		￦	2,000			￦	4,588
		-10%			(2,000	)			(4,588	)
2022.12.31		10%		￦	2,660			￦	113,948
		-10%			(2,660	)			(113,948	)

The analysis above is based on the assumption that the equity index had increased/decreased by 10% with all other variables held constant and all the Group’s marketable equity instruments had moved according to the historical correlation with the index. Gain or loss on equity securities classified as financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income can increase or decrease equity.

(iv) Cash flow and fair value interest rate risk

The Group’s interest rate risk arises from liabilities in foreign currency such as foreign currency debentures. Debentures in foreign currency issued at variable rates expose the Group to cash flow interest rate risk which is partially offset by swap transactions. Debentures and borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group sets the policy and operates to minimize the uncertainty of the changes in interest rates and financial costs.

As at December 31, 2020, 2021 and 2022, if the market interest rate had increased/decreased by 100 bp with other variables held constant, the effects on profit before income tax and shareholders’ equity would be as follows:

(in millions of Korean won)		Fluctuation of interest rate				Impact on profit before income tax				Impact on equity
2020.12.31			+ 100 bp			￦	973			￦	18,584
			- 100 bp				(973	)			(19,377	)
2021.12.31			+ 100 bp			￦	753			￦	5,549
			- 100 bp				(731	)			(5,675	)
2022.12.31			+ 100 bp			￦	635			￦	(2,045	)
			- 100 bp				(669	)			2,100

The above analysis is a simple sensitivity analysis which assumes that all the variables other than market interest rates are held constant. Therefore, the analysis does not reflect any correlation between market interest rates and other variables, nor the management’s decision to decrease the risk.

2) Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s trade receivables from customers, debt securities and others.

- Risk management

Credit risk is managed on the Group basis with the purpose of minimizing financial loss. Credit risk arises from the normal transactions and investing activities, where clients or other party fails to discharge an obligation on contract conditions. To manage credit risk, the Group considers the counterparty’s credit based on the counterparty’s financial conditions, default history and other important factors.

Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as outstanding receivables. To minimize such risk, only the financial institutions with strong credit ratings are accepted.

The Group’s investments in debt instruments are considered to be low risk investments. The credit ratings of the investments are monitored for credit deterioration.

- Security

For some trade receivables, the Group may obtain security in the form of guarantees or letters of credit, etc. which can be called upon if the counterparty is in default under the terms of the agreement.

- Impairment of financial assets

The Group has four types of financial assets that are subject to the expected credit loss model:

• trade receivables for sales of goods and provision of services,

• contract assets relating to provision of services,

• debt investments carried at fair value through other comprehensive income, and

• other financial assets carried at amortized cost.

While cash equivalents are also subject to the impairment requirement, the identified expected credit loss was immaterial.

The maximum exposure to credit risk of the Group’s financial instruments without considering value of collaterals as at December 31, 2021 and 2022, are as follows:

(in millions of Korean won)		December 31, 2021				December 31, 2022
Cash and cash equivalents (except for cash on hand)		￦	2,989,713			￦	2,437,629
Trade and other receivables
Financial assets at amortized costs			5,687,103				7,459,994
Financial assets at fair value through other comprehensive income			491,713				129,124
Contract assets			745,085				802,253
Other financial assets
Derivatives financial assets for hedging			99,453				190,830
Financial assets at fair value through profit or loss			862,481				942,274
Financial assets at fair value through other comprehensive income			94,750				5,432
Financial assets at amortized costs			608,389				1,060,058
Total		￦	11,578,687			￦	13,027,594

The Group is exposed to credit risk for financial guarantee contracts. As at December 31, 2022, the Group’s maximum exposure amount is ￦26,206 million (2021: ￦71,697 million).

(i) Trade receivables and contract assets

The Group applies the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets.

The Group measures the expected credit loss by considering the future irrecoverability rate of the remaining balance of trade receivables and other receivables at the end of the reporting period. Each trade receivables and other receivables are classified considering the credit risk characteristics and overdue periods in order to measure expected credit loss. The expected credit loss rate calculation is based on historical payment and credit loss information in relation to revenue for 36 months period up to December 31, 2022. Expected credit loss of 12 months was applied as the credit sales and other credit-related assets of BC Card Co., Ltd., a subsidiary of the Group, has been determined to have low credit risk.

(ii) Cash equivalents (except for cash on hand)

The Group is also exposed to credit risk in relation cash equivalents. The maximum exposure at the end of the reporting period is the carrying amount of these investments.

(iii) Other financial assets at amortized costs

Other financial assets at amortized cost include time deposits, other long-term financial instruments and others. All of the financial assets at amortized costs are considered to have low credit risk, and the loss allowance recognized during the period was, therefore, limited to 12 months expected losses. Management consider ‘low credit risk’ for other instruments when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term.

(iv) Financial assets at fair value through other comprehensive income

All of the debt investments at fair value through other comprehensive income are considered to have low credit risk, and the loss allowance recognized during the period was, therefore, limited to 12 months expected losses. Management consider ‘low credit risk’ for other instruments when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term. The maximum exposure at the end of the reporting period is the carrying amount of these investments.

(v) Financial assets at fair value through profit or loss

The Group is also exposed to credit risk in relation to financial assets that are measured at fair value through profit or loss. The maximum exposure at the end of the reporting period is the carrying amount of these investments.

3) Liquidity risk

The Group manages its liquidity risk by liquidity strategy and plans. The Group considers the maturity of financial assets and financial liabilities and the estimated cash flows from operations.

The table below analyzes the Group’s liabilities (including interest expenses) into relevant maturity groups based on the remaining period at the date of the end of each reporting period to the contractual maturity date. These amounts are contractual undiscounted cash flows and can differ from the amount in the consolidated financial statements.

		December 31, 2021
(in millions of Korean won)		Less than 1 year				1-5 years				More than 5 years				Total
Trade and other payables		￦	6,698,783			￦	1,232,468			￦	159,647			￦	8,090,898
Borrowings(including debentures)			1,927,456				5,635,558				2,275,557				9,838,571
Lease liabilities			388,226				484,476				427,860				1,300,562
Other non-derivative financial liabilities			1,473				206,749				100,900				309,122
Financial guarantee contracts 1			71,697				—				—				71,697
Total		￦	9,087,635			￦	7,559,251			￦	2,963,964			￦	19,610,850

1 It is total amount guaranteed by the Group according to guarantee contracts. Cash flow from financial guarantee contracts is classified as the maturity group in the earliest period when the financial guarantee contracts can be executed.

		December 31, 2022
(in millions of Korean won)		Less than 1 year				1-5 years				More than 5 years				Total
Trade and other payables		￦	7,386,703			￦	1,009,559			￦	86,848			￦	8,483,110
Borrowings(including debentures)			2,028,207				6,972,077				2,016,472				11,016,756
Lease liabilities			313,162				615,766				407,833				1,336,761
Other non-derivative financial liabilities			33,279				209,155				93,744				336,178
Financial guarantee contracts 1			21,618				—				4,588				26,206
Total		￦	9,782,969			￦	8,806,557			￦	2,609,485			￦	21,199,011

1 It is total amount guaranteed by the Group according to guarantee contracts. Cash flow from financial guarantee contracts is classified as the maturity group in the earliest period when the financial guarantee contracts can be executed.

At the end of the reporting period, the cash outflows and inflows by maturity of the Group’s derivatives held for trading and gross-settled derivatives are as follows:

December 31, 2020

(in millions of Korean won)

Less than 1 year

1-5 years

More than 5 years

Total

Derivatives settled gross 2

Outflow

￦

248,300

￦

2,179,046

￦

498,619

￦

2,925,965

Inflow

249,301

2,074,747

480,570

2,804,618

December 31, 2021

(in millions of Korean won)

Less than 1 year

1-5 years

More than 5 years

Total

Derivatives held for trading 1

Outflows

￦

—

￦

158,284

￦

—

￦

158,284

Derivatives settled gross 2

Outflows

￦

843,489

￦

1,857,942

￦

377,302

￦

3,078,733

Inflows

856,508

1,917,236

394,134

3,167,878

December 31, 2022

(in millions of Korean won)

Less than 1 year

1-5 years

More than 5 years

Total

Derivatives held for trading 1

Outflows

￦

—

￦

101,994

￦

930

￦

102,924

Derivatives settled gross 2

Outflows

￦

472,005

￦

2,493,858

￦

28,786

￦

2,994,649

Inflows

550,478

2,670,002

37,873

3,258,353

1 During the year ended December 31, 2022, derivative liabilities held-for-trading are classified under the ‘more than one year to less than five years’ category as they are relevant to the fair value of derivatives liabilities related to shareholder-to-share contracts (Note 20).

As these derivatives held-for-trading are managed based on net fair value, their contractual maturities are not necessarily taking into consideration to understand the timing of cash flows.

2 Cash outflow and inflow of gross-settled derivatives are undiscounted contractual cash flow and may differ from the amount in the consolidated statement of financial position.

Meanwhile, as at December 31, 2022, the Group is obligated to invest ￦53,120 million in IBK-KT Emerging Digital Industry Investment Fund, a related party, and others, and ￦5,473 million and USD 34,050 thousand to be paid in the future Capital Call method to Future Innovation Private Equity Fund No.3 (Notes 20 and 36).

(2) Management of Capital Risk

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other shareholders and to maintain an optimal capital structure to reduce the cost of capital.

The Group’s capital structure consists of liabilities including borrowings, cash and cash equivalents, and shareholders’ equity. The treasury department monitors the Group’s capital structure and considers cost of capital and risks related each capital component.

The debt-to-equity ratios as at December 31, 2021 and 2022, are as follows:

(in millions of Korean won)		December 31, 2021				December 31, 2022
Total liabilities		￦	20,592,180			￦	22,577,114
Total equity			16,567,161				18,412,696
Debt-to-equity ratio			124	%			123	%

The Group manages capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings less cash and cash equivalents. Total capital is calculated as ‘equity’ in the statement of financial position plus net debt.

The gearing ratios as at December 31, 2021 and 2022, are as follows:

(in millions of Korean won, %)		December 31, 2021				December 31, 2022
Total borrowings		￦	8,437,703			￦	10,006,685
Less: cash and cash equivalents			(3,019,592	)			(2,449,062	)
Net debt			5,418,111				7,557,623
Total equity			16,567,161				18,412,696
Total capital			21,985,272				25,970,319
Gearing ratio			25	%			29	%

(3) Offsetting Financial Assets and Financial Liabilities

Details of the Group’s recognized financial assets subject to enforceable master netting arrangements or similar agreements are as follows:

(In millions of Korean won)

December 31, 2021

Gross assets

Gross liabilities offset

Net amounts presented in the statement of financial position

Amounts not offset

Net amount

Financial instruments

Cash collateral

Trade receivables

￦

79,102

￦

—

￦

79,102

￦

(65,592

)

￦

—

￦

13,510

(in millions of Korean won)		December 31, 2022
		Gross assets				Gross liabilities offset				Net amounts presented in the statement of financial position				Amounts not offset								Net amount
														Financial instruments				Cash collateral
Trade receivables		￦	60,512			￦	—			￦	60,512			￦	(44,518	)		￦	—			￦	15,994
Other financial assets			764				(764	)			—				—				—				—
Total		￦	61,276			￦	(764	)		￦	65,012			￦	(44,518	)		￦	—			￦	15,994

These include price subject to netting arrangements on facility interconnection and data sharing among telecommunication companies.

The Group’s recognized financial liabilities subject to enforceable master netting arrangements or similar agreements are as follows:

(in millions of Korean won)

December 31, 2021

Gross liabilities

Gross assets offset

Net amounts presented in the statement of financial position

Amounts not offset

Net amount

Financial instruments

Cash collateral

Trade payables

￦

69,944

￦

—

￦

69,944

￦

(65,592

)

￦

—

￦

4,352

Total

￦

69,944

￦

—

￦

69,955

￦

(65,592

)

￦

—

￦

4,352

(in millions of Korean won)		December 31, 2022
		Gross liabilities				Gross assets offset				Net amounts presented in the statement of financial position				Amounts not offset								Net amount
														Financial instruments				Cash collateral
Trade payables		￦	47,271			￦	(764	)		￦	46,507			￦	(44,518	)		￦	—			￦	1,989
Total		￦	47,271			￦	(764	)		￦	46,507			￦	(44,518	)		￦	—			￦	1,989

These include price subject to netting arrangements on facility interconnection and data sharing among telecommunication companies.

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The disclosure of the entity's financial risk management practices and policies.

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Reference 1: http://www.xbrl.org/2009/role/commonPracticeRef
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