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Announcement:

Moody's says Korean bank external refinancing adequate over year-end

16 Dec 2008
Moody's says Korean bank external refinancing adequate over year-end

Singapore, December 16, 2008 -- Moody's Investors Service says Korean banks have secured -- with the government's aid -- sufficient foreign currency funding for the remaining weeks of 2008.

"By contrast, when we look ahead, the situation for 2009 is less certain and will hinge on developments in the global credit markets," says Beatrice Woo, a Moody's Vice President/Senior Credit Officer.

Nonetheless, the ability of the banks to meet their 2009 maturing foreign currency obligations will remain backstopped by the willingness of the Korean government to assist the bank in making timely payments, if needed. The Korean government is strongly positioned to assist the bank with (i) USD80 billion in swap lines, and (ii) large foreign currency reserves, which stood at USD200.5 billion at the end of November.

"At the same time, the banks' financial and operating trends continue to deteriorate on the back of the global credit crisis and weaker domestic economy, with no major signs yet of a reversal," adds Woo.

Consequently, the negative outlooks on the bank financial strength ratings (BFSR) of the seven banks are maintained, reflecting also an anticipated worsening in their creditworthiness. For the moment, their credit ratings carry stable outlooks. Moody's will continue to assess if the buffers in the ratings are sufficient to cover the weakening financial fundamentals of the banks

The seven banks are Kookmin Bank (rated Aa3/C), Woori Bank (rated A1/C), Shinhan Bank (rated A1/C), Hana Bank (rated A1/C), Korea Exchange Bank (rated A2/C-), Pusan Bank (rated A2/C-) and Daegu Bank (rated A2/C-).

"Throughout this year, Moody's has been concerned about the persistent tight liquidity positions of Korean banks, particularly in foreign currency funding, which accounts for 12% of system funding," says Woo. "The dislocation of the global financial markets in October --- following Lehman Brothers' collapse --- caused acute funding stress for the Korean banks."

However, since October 19, the government has announced numerous support measures designed to provide foreign currency liquidity to the market.

As such, the Bank of Korea and the government plan to supply USD55 billion in foreign currency via various programs into the swap market, for export & import financing and through unsecured loans.

According to the Ministry of Strategy and Finance, a remaining USD23.1 billion was available at end-November under these schemes: USD15.4 billion for export and import financing, and USD7.9 billion for unsecured loans via competitive bidding.

Another measure is the government's guarantee for three years of the external debt issued up until June 30, 2009 by the local banks. The total amount of the guarantee is limited to USD100 billion. On November 14, 18 local banks signed a Memorandum of Understanding with the government to be eligible for participation in this program.

The above measures immediately alleviated the intense shortage of foreign currency experienced by Korean banks during the crucial period in October.

Post-Lehman collapse, the banks' rollover or refinancing ratio for foreign currency borrowings dropped to 30-50%. Furthermore, since then, they have been obtaining funding at even shorter durations, at higher pricing and with more required collateral than earlier in the year. Moody's believes that part of the issue rests with foreign lenders who are unwilling to lend long due to the year-end effect.

Looking ahead into 2009, Moody's believes that it is difficult to assess how effective the government measures will prove in helping the Korean banks secure medium to long term funding and in sizeable amounts. On balance, external fund raising will likely remain challenging, given the problems that foreign lenders face in their own home markets and the single-A ratings of Korean banks against a backdrop of heightened risk aversion.

Nonetheless, Moody's expects that the Korean banks have sufficient internal foreign currency resources, combined with government provided foreign currency, to tide them over into the new year. Moreover, the banks have built up foreign currency liquidity reserves and carry trade bills which they are able to monetize.

Furthermore, the banks are more aggressively and pro-actively attempting to secure funds for 2009. These efforts include exploring new banking relationships and diversifying funding sources, such as covered bonds. More importantly, the banks appear to be more willing than previously to pay higher spreads in the current environment.

On a positive note, several banks have acquired credit lines since October and without government guarantees: Kookmin Bank USD210 million; Woori Bank USD250 million; Shinhan Bank USD30 million; Hana Bank USD120 million and National Agricultural Cooperative Federation USD100 million.

The government's position has also been strengthened. Most recently by the expansion of bilateral US dollar swap lines from China, which were increased to USD30 billion from USD4 billion, and from the Bank of Japan, which were increased to USD20 billion from USD13 billion. Korea already has a USD30 billion swap line from the US Federal Reserve. These facilities will limit the need to tap Korea's foreign exchange reserves.

And finally, Moody's believes that should the banks' refinancing efforts fall short, the Korean government would be willing to use a substantial portion --- but not all --- of its foreign currency reserves to assist the banks in making timely payments.

The last rating actions for Kookmin Bank, Woori Bank, Shinhan Bank and Hana Bank were taken on October 1, 2008 when the outlook on the C BFSR for all four banks was changed to negative from stable. Their debt and deposit ratings were unaffected and carry a stable outlook.

The last rating actions for Pusan Bank and Daegu Bank were taken on October 7, 2008 when the outlook on the C- BFSR for both banks was changed to negative from stable. Their debt and deposit ratings were unaffected and carry a stable outlook.

The last rating action for Korea Exchange Bank was taken on November 7, 2008 when the outlook on its C- BFSR was changed to negative from stable. Its debt and deposit ratings were unaffected and carry a stable outlook.

The principal methodologies used in rating these issuers are the "Bank

Financial Strength Ratings: Global Methodology", and "Incorporation of

Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology". These can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory.

Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

Kookmin Bank, headquartered in Seoul, had assets of KRW261.6 trillion as of September 2008.

Woori Bank, headquartered in Seoul, had assets of KRW225.1 trillion as of September 2008.

Shinhan Bank, headquartered in Seoul, had assets of KRW205.2 trillion as of September 2008.

Hana Bank, headquartered in Seoul, had assets of KRW149.4 trillion as of September 2008.

Korea Exchange Bank, headquartered in Seoul, had assets of KRW102.0 trillion as of September 2008.

Pusan Bank, headquartered in Pusan, had assets of KRW27.9 trillion as of September 2008.

Daegu Bank, headquartered in Daegu, had assets of KRW26.8 trillion as of September 2008.

Hong Kong
Leo Wah, CFA
Vice President - Senior Analyst
Financial Institutions Group
Moody's Asia Pacific, Ltd - Hong Kong
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077

Singapore
Deborah Schuler
Senior Vice President
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308

Hong Kong
Jerry Chien
Managing Director
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077

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