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Announcement:

Moody's confirms the ratings of Hana Bank and Korea Exchange Bank

28 Feb 2011

Hong Kong, February 28, 2011 -- Moody's Investors Service has confirmed all of Hana Bank's ratings with a stable outlook.

At the same time, Moody's has confirmed Korea Exchange Bank's (KEB) long-term debt and deposit ratings with a positive outlook, and its bank financial strength rating with a stable outlook.

The rating actions on the two banks conclude the reviews initiated on November 25, 2010.

See the end of this press release for the details of each bank's ratings.

The rating actions reflect the progress made by Hana Financial Group Inc (Hana FG; not rated) -- Hana Bank's parent -- to complete the financing for its purchase of a 51.02% stake in KEB from US private equity firm Lone Star.

This financing exercise mostly involved a KRW1.3 trillion rights offering of common shares and an issuance of hybrid securities on February 21.

Hana FG plans to complete the transaction by end-March 2011, pending regulatory approval.

In summary, Hana FG has raised almost all of the KRW 4.7 trillion financing required to buy the stake in KEB -- KRW 2.2 trillion in dividend receipts from its subsidiaries; the KRW1.3 trillion from the equity raising; KRW1.1 trillion in debt financing, and the issuance of hybrid securities.

It had cash and cash equivalent assets of KRW0.6 trillion at end-2010.

"The confirmation of Hana Bank's A1 rating with stable outlook considers the fact that the completion of the KRW1.3 trillion equity raising relieves Hana FG of the financial burden of the acquisition," says Youngil Choi, a Moody's Vice President and Senior Analyst.

Nonetheless, the increased debt to fund the acquisition has weakened the capital structure of Hana FG and thereby puts more pressure on its subsidiaries -- including KEB after the acquisition -- for the next several years. However, Moody's believes that the dividend capacity of Hana FG's subsidiaries is sufficiently strong that this additional debt can be serviced without materially weakening the credit profile of the subsidiary banks.

"At the same time, the confirmation of KEB's A2 rating -- with a positive outlook -- reflects three factors: the improvement in its financial profile, especially in terms of capital adequacy, the resolution of concerns over shareholder uncertainty, and the expected increase in its systemic importance due to membership of Hana FG," adds Choi.

KEB's Tier 1 capital adequacy ratio improved to about 13.17% at end-2010 from 11.04% at end-2009.

The resolution now of the question of ownership benefits KEB as it removes shareholder uncertainty.

Moody's expects that the systemic importance of KEB will increase because KEB will be a part of the bigger banking group, Hana FG.

Achievement of synergies between Hana Bank and KEB is likely to be only gradual. Hana FG plans to maintain KEB as a separate subsidiary, and will not merge KEB with Hana Bank in the foreseeable future.

For Hana FG, as another positive factor, Moody's also considers the relatively large size of likely one-off gains from selling KEB's equity stakes in Hyundai Engineering and Construction Co., Ltd.

Furthermore, Moody's does not see three other outstanding issues as adding a significant additional financial burden to Hana FG, given the group's completion of its financing exercise and the likely limited size of additional funding, if needed.

The three issues -- which involve three scenarios -- are (1) Export-Import Bank of Korea's (KEXIM) tag-along right to sell its 6.25% stake in KEB to Hana FG, (2) compensation to Lone Star if KEB pays dividends less than KRW 850 per share, and (3) compensation to Lone Star if the acquisition is delayed beyond end-March 2011.

In terms of specifics:

1. KEXIM's tag-along right to sell its 6.25% stake in KEB to Hana FG

The possible maximum amount that Hana FG would be obliged to pay to KEXIM would be about KRW0.6 trillion.

On 10 February, KEXIM and Hana FG agreed to exchange call or put options. Hana's possible maximum payment would be about KRW0.6 trillion.

KEXIM can exercise a put option to sell its stake in KEB at KRW14,250 per share -- plus a 7%-per-year yield over a 6-month period -- some six months after Hana FG's completion of its acquisition of its KEB shares from Lone Star.

Hana FG can exercise a call option to buy KEXIM's stake in KEB at KRW14,250 per share over a 4-month period some eight months after Hana FG's acquisition of its KEB shares from Lone Star.

2. Compensation to Lone Star if KEB pays dividends less than KRW 850 per share

The possible maximum amount that Hana FG would be obliged to pay to Lone Star would be about KRW0.314 trillion if KEB decides against paying any cash dividends in 2011.

KEB's board of directors could decide the dividend payment amount as early as March.

3. Compensation to Lone Star if the acquisition is delayed beyond end-March 2011

Hana FG is obliged to pay KRW30 billion per month if Hana FG's acquisition of Lone Star's 51.02% stake in KEB is delayed beyond this date.

Four minority shareholders filed a legal petition to nullify the rights offerings of Hana FG, and Hana FG is in the process of responding to the legal petition.

The last rating action on Hana Bank was on November 25, 2010, when all the long-term ratings of the bank were placed on review for possible downgrade.

The last rating action on Korea Exchange Bank was on November 25, 2010, when the bank's debt and deposit ratings were placed on review for possible upgrade, and its unsupported ratings on review for possible downgrade.

The principal methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology published in February 2007 and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007.

Hana Bank, headquartered in Seoul, had assets of KRW143.32 trillion as of September 30, 2010. It is the fourth largest nationwide commercial bank by assets in the country.

Korea Exchange Bank, headquartered in Seoul, had assets of KRW99.23 trillion as of September 30, 2010. It is the fifth largest nationwide commercial bank by assets in the country.

The rating list of Hana Bank and KEB is:

Hana Bank: Global local currency (GLC) long-term deposit of A1; GLC short-term deposit of P-1; foreign currency long-term senior debt and deposit of A1; foreign currency subordinated debt of A2; foreign currency junior subordinated debt of A2; and bank financial strength rating (BFSR) of C-/baseline credit assessment (BCA) of Baa1; foreign currency short-term debt and deposit of Prime-1. All the ratings carry stable outlook.

KEB: GLC long-term deposit of A2; GLC short-term deposit of P-1; foreign currency long-term senior debt and deposit of A2; and foreign currency subordinated debt of A3; BFSR of C-/BCA of Baa2; foreign currency short-term debt and deposit of Prime-1. All the ratings carry positive outlook, except the Prime-1 short-term rating and C- BFSR that carry stable outlook.

Hong Kong
Young Il Choi
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Hong Kong
Stephen Long
MD - Financial Institutions
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's confirms the ratings of Hana Bank and Korea Exchange Bank
No Related Data.
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