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Announcement:

Moody's takes multiple rating actions on Hana Bank and Korea Exchange Bank

25 Nov 2010

Acquisition announcement prompts rating actions

Singapore, November 25, 2010 -- Moody's Investors Service has placed all of Hana Bank's ratings on review for possible downgrade.

At the same time, Moody's has placed Korea Exchange Bank's (KEB) debt and deposit ratings on review for possible upgrade, and its unsupported ratings on review for possible downgrade.

These actions follow the announcement by Hana Financial Group (Hana FG; not rated) that it will purchase a 51.02% stake of KEB from US private equity firm Lone Star for KRW4.65 to 4.75 trillion. It may also have to acquire The Export-Import Bank of Korea's (A1) 6.25% stake for a further KRW0.57 to 0.58 trillion.

The ratings of Hana Bank on review for possible downgrade are: global local currency (GLC) deposit of A1; 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-, mapping to a baseline credit assessment (BCA) of Baa1.

The ratings of KEB on review for possible upgrade are: GLC deposit of A2; foreign currency long-term senior debt and deposit of A2; and foreign currency subordinated debt of A3. The ratings on review for possible downgrade are its BFSR of C-, mapping to a BCA of Baa2.

"The review of Hana Bank's ratings will evaluate the impact of the huge financing burden of the acquisition on its creditworthiness," says Beatrice Woo, a Moody's Vice President and Senior Credit Officer.

"Although the funding structure of the transaction has yet to be announced, Moody's expects it to be a combination of debt and some form of hybrid instruments such as preference shares. These instruments will require Hana FG to make fixed regular servicing payments. However, Hana FG -- as a shell holding company -- has limited earnings capacity and relatively high leverage ratios," says Woo.

In addition, Moody's expects that Hana FG may explore the scope to reduce the capital levels of both banks since there is a comfortable cushion at both banks over regulatory capital requirements. Any reduction in the core capital levels of either bank would be negative for their stand-alone credit profile.

Hana Bank (as the group's principal earnings contributor) will likely have to play a substantial role in supporting the burden of its parent's acquisition, potentially through a capital reduction and in in terms of greater future amounts of dividends to the parent. Such dividend demands could hurt the bank by limiting its ability to expand its capital base organically.

As for KEB, the review on its credit ratings will consider the bank gaining greater systemic importance in the domestic banking landscape by becoming part of the second largest financial group in Korea.

Such enhanced significance augurs well for higher systemic support. Moody's expects to equalize the debt and deposit ratings of the two banks at either A1 or A2 after the review.

On the other hand, the review for possible downgrade of its BFSR will center on KEB's cash flow contributions to Hana FG and any potential reduction in its capitalization. Given that KEB is a moderately healthy bank -- in terms of its 12.58% Tier 1 capital ratio, recurring earnings generation, and as measured by a C-/Baa2 rating -- Moody's anticipates that it will share the responsibility for any financial servicing of the transaction, though the fact that there will be significant minority shareholders of KEB would mean that Hana FG would only capture 51% of upstreamed cash.

Nonetheless, in Moody's opinion, the resolution of KEB's ownership structure benefits the bank by removing shareholder uncertainty. Since 2006, Lone Star has twice attempted to exit its investment, but both deals were scuttled by protracted regulatory investigations.

In addition, Moody's believes that KEB's franchise and financial fundamentals have good prospects with a strategic shareholder.

Therefore, while Moody's views the acquisition of KEB as synergistic to Hana FG's franchise, particularly in the corporate banking and foreign exchange areas where KEB is strong, potential synergies from the transaction will not likely materialize until the medium term, given the mammoth scale and expected integration challenges.

However, on a positive note, Hana FG's management has experience integrating banks, having acquired three domestic banks in the past 12 years.

On November 24, 2010, Hana FG notified its intent to acquire a 51.02% stake in KEB in a filing to the Korean Exchange. No other details were provided. The deal size is reportedly in the region of KRW4.7 trillion and, when completed, it will elevate Hana FG to the position of second largest financial group in Korea from fourth.

The last rating action on Hana Bank was on April 14, 2010, when its foreign currency long-term senior debt rating and foreign currency long-term deposit rating were raised to A1 from A2 in line with the upgrade of Korea's sovereign rating to A1 from A2 on the same date. The revised ratings all carry stable outlooks.

The last rating action on Korea Exchange Bank was on May 20, 2009, when its C- BFSR was affirmed, but was mapped to a BCA of Baa2 from Baa1. The rating carries a stable outlook.

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 following ratings were placed on review for possible downgrade:

Hana Bank: GLC deposit of A1; 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

KEB: BFSR of C-/BCA of Baa2

The following ratings were placed on review for possible upgrade:

KEB: GLC deposit of A2; foreign currency long-term senior debt and deposit of A2; and foreign currency subordinated debt of A3

The following ratings were affirmed:

Hana Bank: foreign currency short-term debt and deposit of Prime-1

KEB: foreign currency short-term debt and deposit of Prime-1

Singapore
Beatrice Woo
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

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 Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore

Moody's takes multiple rating actions on Hana Bank and Korea Exchange Bank
No Related Data.
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