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Rating Action:

Moody's affirms KDB and KoFC ratings on their re-merger plan

 The document has been translated in other languages

30 Aug 2013

Hong Kong, August 30, 2013 -- Moody's Investors Service has affirmed the ratings of both Korea Development Bank (KDB) and Korea Finance Corporation (KoFC) with stable outlooks.

The rating action reflects Moody's consideration that KDB's announced re-merger with KoFC will not affect the ratings of the two institutions.

A full list of the affected ratings can be found at the end of this press release.

RATINGS RATIONALE

"The rating action reflects the consideration that the high probability of government support remains the key ratings driver behind the Aa3 long-term local currency ratings of both institutions," says Hyun Hee Park, a Moody's Analyst.

"KDB's renewed role as a policy bank means that it will continue to engage in policy lending and corporate restructuring, which carry high risk profiles. During recent years, KDB has reported improved liquidity, asset quality and profitability as it prepared for privatization. With the re-merger, there is a risk that KDB will now re-engage in policy-driven lending, thereby putting its financial performance under renewed pressure," adds Park.

However, Moody's also consider KDB's strong capitalization and asset holdings as mitigating factors that will support its credit profile. KDB currently exhibits strong capitalization, as reflected in its Tier 1 capital ratio of 13.02% at end-March 2012. This level is one of the highest among Korean banks.

Moreover, Moody's considers that the re-merger would establish a clear basis for KDB to receive ongoing ordinary support, which is one of key factors supporting its standalone credit assessment.

With the re-merger, Moody's believes that KDB will more likely maintain a strong level of capitalization on the basis of ongoing government support. Moody's notes that since the government put KDB up for privatization in 2009, it has not -- as it was its frequent practice before -- provided support in the form of capital injections.

Furthermore, KDB may be able to offset the renewed pressure by boosting its earnings and capital as it may profitably sell the substantial equity holdings that it acquired during previous financial and market crises at very low, distressed prices.

The re-merger of KDB and KoFC is expected to take place in July 2014.

The Geun-hye Park administration's abandonment of the privatization agenda for KDB suggests that it is keen -- unlike its predecessor -- to maintain KDB as an important policy platform to help enterprises in strategically important sectors, including small- and medium-sized enterprises.

The methodologies used in this rating were Global Banks published in May 2013, and Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

KDB -- the long-term deposit ratings of Aa3; the senior unsecured debt ratings/senior unsecured MTN /senior unsecured shelf ratings of Aa3/(P)Aa3/(P)Aa3; BFSR of D, which maps to standalone credit assessment of ba2; short-term bank deposit rating/ commercial paper /MTN programme short-term ratings of P-1/P-1/(P)P-1.

KDB, New York Branch -- commercial paper programme short-term rating of P-1

KDB, London Branch -- senior unsecured debt ratings of Aa3, Senior Unsecured MTN ratings of (P)Aa3, and MTN programme short-term ratings (P)P-1

KoFC -- the foreign currency long-term issuer of Aa3, and foreign currency long-term senior unsecured debt/senior unsecured MTN of Aa3/(P)Aa3; foreign currency short-term issuer/commercial paper of Prime-1/Prime-1; standalone credit profile of ba1.

KDB was established in 1954 as a government-owned financial institution pursuant to the KDB Act. It had KRW146.4 trillion in assets ($137.7 billion) as of end-2012.

KoFC was established when KDB spun off certain assets and liabilities on October 28, 2009. With its assets, it had KRW71.2 trillion ($70.0 billion) on a non-consolidated basis and KRW243.7 trillion ($229.3 billion) on a consolidated basis as of end-2012.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Hyun Hee Park
Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's affirms KDB and KoFC ratings on their re-merger plan
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