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This case was prepared by George Allayannis, Assistant Professor of
Business Administration. This case was written as a basis for class
discussion rather than to illustrate effective or ineffective
handling of an administrative situation. Copyright 2002 by the
University of Virginia Darden School Foundation, Charlottesville,
VA (revised 2003). All rights reserved. To order copies, send an
e-mail to [email protected]. No part of this publication may
be reproduced, stored in a retrieval system, used in a spreadsheet,
or transmitted in any form or by any meanselectronic, mechanical,
photocopying, recording, or otherwisewithout the permission of the
Darden School Foundation.
Graduate School of Business Administration
University of Virginia
RISK EXPOSURE AND RISK MANAGEMENT AT KOREA FIRST BANK
It was the end of December 1998, and Mr. Dong-Hyun Kim, Chairman
of the Board of Managing Directors and President of Korea First
Bank (KFB) was reflecting over the last two tumultuous years, by
far, the most challenging years in the 70-year long history of
Korea First Bank. As many banks in Korea, KFB had suffered
tremendously as a result of the Asian Crisis during 1997. However,
what was most present in Mr. Kims mind were the many problems tha t
KFB was entangled with, even in the absence of the crisis, most
notably, the exposure of KFB to Hanbo Steel, a member of the Hanbo
chaebol, whose bankruptcy in January 1997 threatened the mere
existence of KFB. Not only was KFBs exposure to Hanbo
disproportionally large, but also this large exposure was allegedly
facilitated by large commissions received by the previous president
of KFB. Both he and the president of Cho Hung Bank were arrested
early 1997 for their involvement in the case.1 Was this event
something that KFB would be able to disassociate itself with and
move forward, or was this something that was lingering and might
manifest itself in a different way in the future? Were there other
types of operational risk that the bank had yet to identify? Mr.
Kim took a pen in his hand and started jotting down all the types
of risk that the bank faced: credit, interest rate, exchange rate,
market, liquidity, and operational risk. How were all these risk
exposures identified and managed at KFB? What could KFB have done
differently during the last two years to have managed those risks
better, so that it could have weathered the Asian crisis and the
downturn in the Korean economy? What should the Korean government
or the international regulators have done differently, so that KFB
would not have reached the brink of collapse? He immediately
started poring over the annual reports of the past two years
(Exhibits 1 & 2 show consolidated balance sheet and income
statement information). He was determined to propose the conduct of
an exhaustive study of risks and risk management actions at KFB in
the next meeting of the Board.
1 See Thompson Bankwatch Inc., Korea First Bank Report, February
11, 1997 and September 27, 1991.
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The Korean Banking System
The Korean financial system has been largely controlled by the
government. Government intervention is more prevalent in the
banking system, where often credit is directed towards industries
that are deemed critical by the government to Koreas economic
development.2 This policy was quite successful in the 1980s;
however, as the economy continued to grow during the eighties and
became more diverse and multifaceted, the apparent inefficiencies
in the system were ultimately revealed. In the 1980s the first wave
of bank privatizations took place, when 5 banks were privatized.
But, it was not until 1993, when the new government devised its
5-year financial reform plan, that the first steps towards banking
deregulation, liberalization of the market, capital flows and
foreign exchange took place. The opening of the financial markets
brought also a wave of foreign competition. These liberalization
measures were successful enough to warrant a spot for Korea in the
OECD at the end of 1996. However, many of the structural problems
in the Korean banking sector remained, most notably, lack of rigid
credit policies as well as lack of asset diversification. In
addition, this liberalization brought several new issues to light,
such as the exposure of Korean banks to foreign competition and the
exposure to more intense foreign exchange risks. The banking system
in Korea is supervised by the Bank of Korea (BOK). The BOK is in
charge of the stability of the banking system and performs all
functions associated with a central bank, such as managing foreign
exchange reserves and controlling money supply. It also acts as a
lender to the banks and overseas their operations. In the past BOK
has managed bank credit by setting the maximum rates for loans and
deposits. At the end of 1991, the government started a plan to
liberalize interest rates and the financial markets more broadly.
By 1995, the majority of interests paid on deposits had been
deregulated. The BOK also implements and monitors capital and
reserve requirements that Korean banks have to meet. As of early
1996, all Korean Banks are required to adhere to the BIS capital
adequacy standards, which was 8% at the time. In addition to that,
they must also maintain a capital of W100 billion. In 1998, Korea
had 16 nationwide commercial banks and 69 branches of foreign banks
(Exhibit 3 shows Nationwide Commercial Banks ranked by size). The
Korean Financial Crisis, 1997-1998. The early signs of the crisis
were visible in 1996. The current account deficit increased to 5%
of GNP from 2% the year before. Foreign debt rose to 76% of total
exports. Exports, which 2 See Banking System Report: South Korea,
Thompson Bank Watch Inc., April 28, 1998.
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was Koreas traditional engine behind its vibrant economy
exhibited immense slowdown: the rate of growth decreased to 15%
from a high of 31% the previous years.3 Much of the decrease in
exports growth was due to the relative appreciation of the Korean
won versus the yen, which affected the competitiveness of Korean
exporters and the sharp decline in the price of computer chips,
automobiles and ships, which constitute some of the major Korean
exports. At the same time, interest rates increased, putting even
more pressure on corporate profits. In January 1997, Hanbo Steel,
the 14th largest chaebol went bankrupt. Another steel producer, the
Samni group, followed suit. Then came Jinros turn, the 19th largest
chaebol, and the Ssangyong business group, the 6th largest. In July
1997, Kia motors, the third largest automotive company defaulted on
its loans. The stock market responded and by November it was 50%
down compared to its peak in mid-1997. The won fell by 50% in the
course of two weeks in November. The Korean bonds were downgraded
by Moodys and S&P to junk status early December and many
foreign institutional investors had to drop them from their
portfolios. The Korean government sought the help of the IMF and in
January 1998 Korea was able to sign a deal with a consortium of
international lenders for the rollover of $60 billion of its debt
under quite favorable terms. This in turn, allowed the Korean
government to guarantee $24 billion of bank debt. The Korean banks
desperately needed the help. With huge exposure to faltering
industrial conglomerates and mounting losses from equity
investments in the Korean market, many banks were close to
bankruptcy. Some argued that the Korean banking system, modeled
after the Japanese system as a relationship banking system was in
part to be blamed for the situation. 4 Relationship banking allows
for close contact and communication between borrowers and
lenders-the idea is that lenders have access to information
regarding business conditions and investment on an on-going and
timely basis; however, the system is also open to manipulation and
often it takes time for information to reach the lender.5 Korea
First Bank A Brief History Korea First Bank (KFB) was founded on
July 1st, 1929 in the capital of Korea, Seoul.6 KFB was the first
bank to specialize in retail banking and established its operations
under the name Chosun Deposit Bank. By the end of 1935, Chosun had
expanded nationwide operating 4 braches and 1 office. In December
1957, Chosun was privatized as a result of a new banking law which
came into effect earlier that year. In December 1958, Chosun
changed its name to its current, Korea First Bank (KFB). A new
growth period started for the bank then and many new products were
created. Among other innovations, KFB had the first check- issuing
machines in Korea. In 1968, the bank began its international
expansion with the opening of a branch in Osaka, Japan. Since then,
KFB has established a network of 10 branches in such international
3 See The Korean Financial Crisis of 1997-98, I. Adelman and Song
Byung Nak, University of California, Berkeley Working Paper. 4See
The Korean Financial Crisis of 1997-98, I. Adelman and Song Byung
Nak, University of California, Berkeley Working Paper. 5 An
alternative system, that of arms length relationships is at the
foundation of the banking system in the US and UK, among other
countries. 6 See Korea First Bank Annual Report, 1998.
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centers as New York, London, and Hong Kong. KFB was also on the
forefront of automation and became the first bank to connect all of
its 105 domestic branches with on- line banking services in
December 1980. The 1990s saw continued expansion in other areas of
banking and despite increasing competition by foreign banks the
bank reported its highest profits for 3 consecutive years in the
early nineties. Korea First Bank 1997-1998 By far the most
significant event in the two-year period for KFB was the bankruptcy
of Hanbo Steel Corporation, one of the banks largest borrowers.
Specifically, the estimated exposure of KFB to Hanbo Steel was in
the order of $1 billion (out of Hanbos total debt of $6 billion).7
Hanbo was established in 1974 by Mr. Chung Tai-soo, as a
construction company who took advantage of his government contacts
to obtain scarce bank capital from state-controlled banks. Like
other chaebols, Hanbo expanded into other unrelated businesses
acquiring a steel company in 1989, a pharmaceutical company in
1993, and a mutual savings and finance company in 1994.8 Hanbo
decided to build the worlds largest steel mill in 1993. Costs for
the project grew almost to double of what was budgeted and amounted
to W5700 billion; at the same time, steel demand was in the
decline. With only W315 billion in shareholders equity the debt to
equity ratio of Hanbo Steel shot to 1600 per cent. Analysts were
puzzled by the lending of W5000 billion by Korean banks without a
feasibility study of the steel project and without securing
adequate collateral for the loans. It was obvious that the banks
did not pay any attention to the government restrictions on
excessive lending to the chaebols.9 Hanbo has had very close
relationships with KFB, its main creditor. In 1995, when Youone, a
big construction company, went into bankruptcy and was a serious
threat to KFBs amount of non-performing loans and earnings, Hanbo
acquired Youone to decrease KFBs exposure. In June 1997, four
former executives of KFB were sued for negligence in the Hanbo
Steel loaning case, believed to be the first such lawsuit in South
Korea. Two former presidents of the bank who were mentioned in the
lawsuit were already convicted for accepting bribes from Hanbo in
exchange for the loans. A picture of KFB as reflected by its stock
price during 1997-1998 is shown on Figure 1 along with a graph of
the Korean Total Market Index for comparison. Figure 2 compares the
normalized- market values of KFB, the Korean Finance Index, and the
Total Market Value. Korea First Bank Risk Exposure and Risk
Management Mr. Dong-Hyun Kim was wondering whether the credit
policies of KFB were in need of complete overhaul so that KFB would
never experience any other threat to its existence such as the one
with Hanbo. He was wondering whether the asset base was diversified
enough or whether there were hidden risks. Exhibit 4 shows KFBs
Loan Data information at the end of
7 See Korea First Bank (A), Harvard Business School, case
9-701-022, Exhibit 3. 8 See Financial Times, January 28, 1997. 9
See Financial Times, January 28, 1997.
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1996, 1997 and 1998 broken down by currency (won versus foreign)
and by industry. Exhibit 5 shows equity return correlations among
the main industrial segments in Korea, and Figure 3 graphs the
relative stock price performance of four of the main industries
that KFBs loans were concentrated in. Exhibits 6 & 7 show KFBs
Non-Performing loan data and its Loan Loss Reserves, while Exhibit
8 shows related data for some of KFBs main Korean competitors as
well as for a US bank of similar size. Mr. Kim was also concerned
about lending excessively to chaebols- it was not clear that the
data he had collected could definitively allow him to address this
question, but at the minimum, it was a good start. Mr. Kim then
moved on to the data describing KFBs investment holdings (See
Exhibit 9). He thought that this data could help him better
understand KFBs market risk. Two of his major concerns were the
exposure of interest and foreign exchange risk. He feared that KFBs
interest and FX risk were high and could potentially threaten KFBs
operations. How could he quantify these exposures? He thought that
data on interest rate sensitivity (Exhibit 10), on interest
generating assets and liabilities broken down by won and foreign
currency (Exhibit 11) and KFBs Net Interest Income and Expense
(Exhibit 12) would be most helpful. He also took a look at 2
graphs, one depicting a normalized country prime rate comparison
(Figure 4) and one depicting normalized Asia-pacific currencies
versus the US Dollar (Figure 5). Finally, he thought that the
Maturity Gap data would give him a good indication of KFBs
liquidity risk (See Exhibit 13). Clearly, identifying the risk
exposures would be the first priority of KFB, but by far, the most
important step would be to decide on how to manage these risks. Did
KFB possess any competitive advantages in any of these risks?
Should they manage some risks and not others? Should they manage
all of them? To what extent should they be managed? He realized
that he needed to quantify some of the risks and had heard about
the KMV methodology that is used to estimate credit risk (default
probability) using the standard deviation of the assets as one of
the inputs. By making some assumptions, he hoped that data on
equity volatility (Exhibit 14) could be used instead. He felt that
he had to go back in time and estimate these default probabilities
and see for himself whether KFB could have done anything different
ly to avoid the crisis. He also knew that there are board members
who would say to him that: our shareholders are entrusting us in
taking some risks: if we do not take any risks, we are not
enhancing shareholder value. What could he reply to them?
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Exhibit I
Korea First Bank Consolidated Balance Sheet
(all figures in millions of Korean Won except for exchange rate
data)
1998 1997 1996
Exchange Rate 1204 1600 841
(Korean won to US Dollar as of year end)ASSETS
cash and due from banks 2,614,021 3,176,037 3,708,713 loans
15,025,982 20,360,639 20,208,399
call loans 577,694 218,819 321,010 securities 8,309,811
9,022,784 11,781,655
foreign exchange 1,422,998 2,481,595 2,674,736 customers
liabilities on guarantees 1,466,348 3,510,978 4,475,788
premises and equipment 1,830,423 1,093,474 876,068 other assets
2,250,808 1,876,511 1,968,187
consolidation adjustment debit - 50,362 100,724 33,498,085
41,791,199 46,115,280
LIABILITIES
deposits 22,478,076 27,581,402 26,910,616 call money 179,718
1,031,542 2,162,595
borrowings 4,211,966 5,908,450 7,291,511 guarantees outstanding
1,466,348 3,510,978 4,475,788
provisions 2,430,539 1,206,061
other liabilities 2,570,805 2,367,466 3,361,945 33,337,452
41,605,899 44,202,455
MINORITY INTERESTS 109,389 115,277 144,367
SHAREHOLDERS EQUITY
common stock 1,600,000 820,000 820,000 capital surplus 16,610
213,820 502,361
retained earnings (1,914,597) (963,881) 446,446 capital
adjustment 349,231 (408) (1,180)
consolidation adjustment credit 492 831 51,244 70,023
1,768,458
Total Liabilities, Minority Interest 33,498,085 41,791,199
46,115,280 and Shareholders Equity
Source: Korea First Bank Annual Reports; 1997, 1998.
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Exhibit 2
Korea First Bank Statement Of Operations
(all figures in million of Korean Won except for exhchange rate
figures)
1998 1997 1996
Exchange Rate 1204 1600 841
(Korean won to US Dollar as of year end)
Revenue
interest income 2,359,264 2,401,889 2,183,425
interest and dividends on securites for sale 356,054 857,854
1,207,088 interest and dividends on investment securities 420,353
263,505 -
fees and commissions 299,710 318,821 294,614
other operating income 737,430 612,296 178,448 non-operating
income 122,577 157,077 98,297
4,295,388 4,611,442 3,961,872 Expenses
Interest expense 3,158,489 3,024,548 2,718,878 fees and
commissions 24,138 26,567 23,568
general and administrative 390,406 477,510 451,442 other
operating expenses 2,932,734 1,745,687 726,742
non-operating expenses 478,425 980,884 20,740 6,984,192
6,255,196 3,941,370
Gain(Loss) before income tax expense (2,688,804) (1,643,754)
20,502
Income tax expense 320 5,402 10,451
Loss before minority interest (2,689,124) (1,649,156) 10,051
Net loss attributable to minority interest 14,655 14,243 (4,898)
amortization of consolidation adjustment, net 50,178 50,130
50,064
equity in net loss of affiliates, net 6,382 117 (5,400)
Consolidated Net gain(loss) (2,731,029) (1,685,160) (39,511)
Source: Korea First Bank Annual Reports; 1997, 1998.
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Exhibit 3
Nationwide Commercial Banks Ranked by Size
1 Korea Exchange Bank2 Cho Hung Bank
3 Hanil Bank4 Kookmin Bank
5 Korea First Bank6 Commercial Bank of Korea
7 Shinhan Bank8 Seoulbank9 Housing and Commercial Bank
10 Boram Bank11 Donghwa Bank
12 Hana Bank13 KorAm Bank
14 DongNam Bank15 Daedong Bank
16 Peace Bank Source: Thompson Bankwatch Inc., Banking System
Report: South Korea, April 28, 1998.
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Exhibit 4
Korea First Bank Loan Data
(all figures in billion of Korean Won)
1998 % 1997 % 1996 %
total total totalExchange Rate 1204 1600 841(Korean won to US
Dollar as of year end)Won Denominated
Business Loans** 6,457.6 50.4% 7,479.7 45.1% 8,787.0 53.3%
Household Loans 1,374.0 10.7% 1,948.3 11.7% 1,626.8 9.9%Local
L/C Bills Bought 58.6 0.5% 29.4 0.2% 112.1 0.7%
Advances to Customers 506.1 3.9% 146.2 0.9% 252.9 1.5%Total
8,396.3 9,603.6 10,778.8
Foreign Currency Denominated
Onshore 3,554.6 27.7% 6,397.6 38.5% 5,159.0 31.3%
Offshore 596.8 4.7% 441.1 2.7% 278.9 1.7%Domestic Import Usance
Bills 0.1 0.0% 5.8 0.0% 1.4 0.0%
Advances to Customers 267.8 2.1% 151.1 0.9% 252.9 1.5%Total
4,419.3 6,995.6 5,692.2
TOTAL LOAN PORTFOLIO 12,815.6 16,599.2 16,471.0
% % %
1998 total 1997 total 1996 total** Won Denominated Business
Loans
(By Industry)Automobiles 233.5 3.6% 288.9 3.9% 402.8 4.6%
Chemicals 407.7 6.3% 432.5 5.8% 486.9 5.5%Textile & Garments
571.4 8.8% 544.6 7.3% 668.3 7.6%
Construction 586.4 9.1% 651.5 8.7% 1278 14.5%Wholesale &
Retail 616.3 9.5% 941.7 12.6% 1057.1 12.0%
Others 4042.3 62.6% 4620.5 61.8% 4893.9 55.7%TOTAL 6457.6 7479.7
8787
Source: Korea First Bank Annual Reports; 1997, 1998.
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Exhibit 5
INDUSTRY CORRELATIONS (Korean Stock Market Industry Index Data
from period 1993-1998)
General Market Paper Natural Metals Wholesale Transport.
Textile/Apparel Construction Financial Electronics Food/Beverage
Basic Metals Chemicals Transport Eqpt. Machinery Investments
Insurance Medical
General Market 100.0% 89.4% 97.5% 90.1% 95.7% 96.9% 96.4% 87.6%
70.8% 70.8% 85.7% 95.9% 90.0% 82.0% 91.3% 55.5% 53.1%
Paper 89.4% 100.0% 87.5% 74.1% 91.4% 93.8% 85.8% 72.0% 69.3%
84.3% 76.7% 94.4% 73.7% 65.7% 84.7% 47.0% 71.1%
Natural Metals 97.5% 87.5% 100.0% 94.4% 91.8% 97.1% 97.7% 90.4%
57.5% 65.3% 82.1% 95.3% 93.9% 87.3% 92.2% 44.0% 48.9%
Wholesale 90.1% 74.1% 94.4% 100.0% 81.2% 90.1% 95.6% 96.9% 37.5%
41.4% 68.4% 85.4% 99.2% 96.3% 90.4% 22.9% 26.9%
Transportation 95.7% 91.4% 91.8% 81.2% 100.0% 94.7% 90.5% 76.6%
78.5% 73.8% 87.3% 94.3% 81.2% 70.6% 85.7% 55.1% 52.4%
Textile/Aparel 96.9% 93.8% 97.1% 90.1% 94.7% 100.0% 96.3% 87.4%
63.4% 73.0% 78.8% 95.5% 89.7% 81.4% 94.8% 46.8% 57.6%
Construction 96.4% 85.8% 97.7% 95.6% 90.5% 96.3% 100.0% 95.0%
53.1% 58.5% 74.2% 91.8% 94.4% 88.7% 95.5% 42.1% 40.7%
Financial 87.6% 72.0% 90.4% 96.9% 76.6% 87.4% 95.0% 100.0% 32.8%
37.5% 57.1% 80.9% 95.8% 93.7% 92.3% 24.3% 24.6%
Electronics 70.8% 69.3% 57.5% 37.5% 78.5% 63.4% 53.1% 32.8%
100.0% 76.7% 80.1% 67.4% 38.6% 26.3% 48.4% 77.9% 61.8%
Food/Beverage 70.8% 84.3% 65.3% 41.4% 73.8% 73.0% 58.5% 37.5%
76.7% 100.0% 69.0% 75.3% 41.1% 29.1% 61.6% 68.4% 89.8%
Basic Metals 85.7% 76.7% 82.1% 68.4% 87.3% 78.8% 74.2% 57.1%
80.1% 69.0% 100.0% 87.0% 70.3% 61.7% 62.1% 53.1% 50.0%
Chemicals 95.9% 94.4% 95.3% 85.4% 94.3% 95.5% 91.8% 80.9% 67.4%
75.3% 87.0% 100.0% 86.2% 79.7% 85.2% 43.0% 57.5%
Transport Eqpt. 90.0% 73.7% 93.9% 99.2% 81.2% 89.7% 94.4% 95.8%
38.6% 41.1% 70.3% 86.2% 100.0% 97.0% 88.4% 20.9% 26.4%
Machinery 82.0% 65.7% 87.3% 96.3% 70.6% 81.4% 88.7% 93.7% 26.3%
29.1% 61.7% 79.7% 97.0% 100.0% 80.3% 7.2% 15.2%
Investments 91.3% 84.7% 92.2% 90.4% 85.7% 94.8% 95.5% 92.3%
48.4% 61.6% 62.1% 85.2% 88.4% 80.3% 100.0% 43.4% 49.9%
Insurance 55.5% 47.0% 44.0% 22.9% 55.1% 46.8% 42.1% 24.3% 77.9%
68.4% 53.1% 43.0% 20.9% 7.2% 43.4% 100.0% 59.8%
Medical 53.1% 71.1% 48.9% 26.9% 52.4% 57.6% 40.7% 24.6% 61.8%
89.8% 50.0% 57.5% 26.4% 15.2% 49.9% 59.8% 100.0%
Source: Bloomberg Data
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-11-Exhibit 6
Korea First Bank
Non-Performing Loan Data (In Billions of Korean Won)
Loan Classification 1998 1997 1996Exchange Rate 1204 1600
841
(Korean won to US Dollar as of year end)Normal 11,663.9 21,221.4
23,268.4
Precautionary 3,295.3 2,563.0 2,792.2 Substandard 2,188.5
1,566.5 1,525.8
Doubtful 1,522.3 1,433.9 261.7
Estimated Loss 121.5 55.5 82.2 TOTAL CREDITS** 18,791.5 26,840.3
27,930.3
Bad Loans*** 1,643.8 1,489.4 343.9 % of credits 8.7% 5.5%
1.2%
Non-Performing Loans*** 3,832.3 3,055.9 1,869.7 % of credits
20.4% 11.4% 6.7%
Systemwide NPL as % of credits 7.4%
(Defined as Total Non-Performing Loans held by Korea's 20
Commercial Banks)
** Under FSC guidelines, Total Credits includes loans in banking
accounts, advances to customers, domestic import usuance bills,
local L/C bills bought,
credit card loans, customers liabilities on guarantees, and
loans in trust accounts. *** Bad Loans is an aggregation of
Doubtful plus estimated loss loans. Non-Performing Loans represents
the sum of Bad Loans plus Substandard Loans
FSC (Financial Supervisory Commision) guidelines on Loan Status
Classification
NORMALCredits in arrears for less than one month (previous
standard was three months)PRECAUTIONARY
Credits in arrears for one to three months (previously three to
six months)SUBSTANDARD
Secured portion of total credits in arrears more than three
months and where
loss is expected but still undetermined (previously six
months)DOUBTFUL
Unsecured portion of credits in arrears for more than three
months and whereloss is expected but still undetermined (previously
six months)ESTIMATED LOSS
Unsecured portion of credits deemed impossible to recover and
where loss isexpected but still undetermined
Source: Korea First Bank Annual Reports; 1997, 1998,
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Exhibit 7
Korea First Bank Loan Loss Reserves (In Billions of Won)
1998 1997
Exchange Rate 1204 1600
(Korean won to US Dollar as of year end)Reserve at January 1st
642.7 419.5
Provision for Loan Losses 796.8 451.4Write-Offs 226.8
259Adjustments 298.4 30.8
Reserve at December 31st 1511.1 642.7
FSC guidelines stipulate that Korean commercial banks set aside
a reservefor loan losses at the end of each fiscal year. The
reserve requirements
(at full coverage) are as follows:Normal Credits: .5%
Precautionary Credits: 2%Substandard Credits: 20%
Doubtful Credits: 75%Estimated Loss: 100%
The minimum permissible loan loss reserve is currently set at
100% of full coverage. This is up from 75% in 1996 and 88% in
1997.
Source: Korea First Bank Annual Reports; 1997, 1998.
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EXHIBIT 8
Korea First Bank Comparable Company Metrics
(All non-percent figures in Billions of Korean Won)(Summit
Bancorp is a United States bank of similar size. Their financials
were translated to Won for comparison purposes)
Company Hana Bank Cho-Hung Bank
For the Year Ended 1998 1998 1998 1997 1998 1997 1998 1997
Total Interest Earning Assets 20279 32726.3 60938.4 59442.4
25109.0 26629.5 36439.3 45212By Type
Loans 60.9% 65.6% 61.0% 64.8% 58.3% 70.2% 65.3% 65.3%Securities
28.1% 27.9% 20.5% 20.4% 20.9% 16.1% 31.1% 30.6%
Liquid Assets/other 11.0% 6.5% 18.4% 14.7% 20.8% 13.7% 3.4%
4.1%
By CurrencyWon currency 86.4% 58.7% 57.4% 58.9% 62.6% 59.6% n/a
n/a
Foreign currency 13.6% 41.3% 42.6% 41.1% 37.4% 40.4% n/a
n/aAverage Interest Rate For Assets 14.4% 11.2% 11.2% 8.7% 10.6%
8.4% 7.5% 7.6%
Total Interest Bearing Liabilities 19685.2 32891.2 60843.7
57994.7 25346.8 11855.1 28149.8 35073.8By Type
Deposits 61.7% 53.1% 69.9% 64.0% 73.1% 60.0% 75.1%
81.4%Borrowings 31.0% 40.8% 22.9% 26.0% 22.4% 33.2% 24.9% 18.6%
Liquid Liabilities/Other 7.3% 6.1% 7.2% 10.0% 4.5% 6.8% - -
By CurrencyWon currency 86.1% 62.4% 57.8% 50.6% 63.5% 59.5% n/a
n/a
Foreign currency 13.9% 37.6% 42.2% 49.4% 36.5% 40.5% n/a
n/aAverage Interest Rate For Liabilities 11.6% 8.9% 9.5% 6.8% 10.4%
7.2% 4.3% 4.2%
Spread 2.8% 2.2% 1.7% 1.9% 0.2% 1.2% 3.2% 3.4%Total Shareholders
Equity 929.3 135 3844.9 2939.0 51.2 70.0 3277.8 4179.9
Revenue 2911.2 5706 9679.1 7583.4 4295.4 4611.4 3040.6
3786.5Expense 2766.9 7677 13039.5 8028.2 6984.2 6255.2 2479.8
3193.0Net Income 144.3 -1971 -3360.4 -444.8 -2688.8 -1643.8 560.8
593.5
BIS Capital Ratio Tier 1 7.9% 0.47% 7.92% 3.98% -1.27% 0.57% n/a
n/a
Tier 2 5.2% 0.46% 4.16% 3.25% 0.00% 0.57%NPL/total credits
outstanding n/a 5.5% 5.4% 4.2% 20.4% 11.4% 0.7% 0.9%Loan Loss
Provision/Total Credits 2.9% 2.5% 2.8% 1.3% 8.0% 2.4% 1.6%
1.6%Securities Investments 6966.5 6274 16633.4 12308 5662.5 4454.6
12000.0 14715.4
corporate securities./ total sec. 46.5% 36.7% 45.5% 28.0% 36.4%
34.1% 4.2% 3.4%
Exchange Rate (Korean won to US Dollar as of year end 1998, 1997
of 1204, 1600 respectively)Data Source: Annual Reports; Hana Bank
1999, Cho-Hung Bank 1999, Hanvit Bank 1998, Korea First Bank 1998,
and Summit Bank 1998.
Hanvit Bank Korea First Bank Summit Bancorp
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EXHIBIT 9
Korea First Bank Investment Holdings
(in billions of Korean Won)
1998 1997 1996
Exchange Rate 1204 1600 841
(Korean won to US Dollar as of year end)Won Currency
Government Bonds 660.8 504.8 398.4 Local Government Bonds 23.6
15.1 -
Financial Business Bonds 542.9 233.9 1,119.5 Government
Guaranteed Debentures 1,395.9 1,213.7 -
Debentures 696.8 651.9 657.7 Equity Investments 1,366.2 868.9
1,268.4
Other 293.3 68.1 116.9 Total Won Investments 4979.5 3556.4
3560.9
Foreign Currency
Onshore 644.4 811 802.9Offshore 38.6 87.2
Total Foreign Investments 683 898.2 802.9
Valuation Allowance 99.2TOTAL INVESTMENT HOLDINGS 5662.5 4454.6
4264.6
% corporate exposure 36.4% 34.1% 45.2%(equity + debentures)
Source: Korea First Bank Annual Reports; 1997, 1998.
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EXHIBIT 10
Korea First Bank
Interest Rate Sensitivity (in billions of Korean Won, except for
Foreign Currency exposure which is in US dollars)
Data as of 12/31/98
Within
3 mos 4mos - 1yr over 1 yr TotalBANKING ACCOUNTS
Won Currency
rate sensitive assets 7,739.5 1,375.3 4,905.6 14,020.4 rate
sensitive liabilities 9,399.4 3,346.9 2,125.3 14,871.6
Gap (1,659.9) (1,971.6) 2,780.3 (851.2)
assets/liabilities 82.3% 41.1% 230.8% 94.3%
Foreign Currencies
rate sensitive assets 5,201.0 1,281.0 46.0 6,528.0 rate
sensitive liabilities 5,488.0 1,332.0 48.0 6,868.0
gap (287.0) (51.0) (2.0) (340.0)
assets/liabilities 94.8% 96.2% 95.8% 95.0%
TRUST ACCOUNTS**rate sensitive assets 2,917.0 824.4 729.4
4,470.8
rate sensitive liabilities 502.8 1,048.3 2,088.0 3,639.1 gap
2,414.2 (223.9) (1,358.6) 831.7
assets/liabilities 580.2% 78.6% 34.9% 122.9%** Trust accounts
with guaranteed principal and/or interest
Source: Korea First Bank Annual Reports; 1997, 1998.
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EXHIBIT 11
Korea First Bank
Average Interest Generating Assets & Liabilities (In Billion
of Korean Won)
Avg. Avg. Avg.
1998 Rate 1997 Rate 1996 RateExchange Rate 1204 1600 841(Korean
won to US Dollar as of year end)ASSETS
Won Currency
Loans 9,120.3 13.4% 11,908.3 10.0% 10,322.9 10.1%
Securites 4,526.9 8.7% 3,293.4 7.9% 3,385.8 8.1%
Other Assets 2,075.3 13.3% 676.6 12.2% 548.5 10.8%
Foreign Currencies
Loans 5,529.3 6.7% 6,773.1 6.6% 5,526.0 6.4%
Securites 721.5 4.5% 1,001.7 5.2% 728.3 6.1%
Other Assets 3,135.7 11.7% 2,976.4 7.4% 717.4 4.6%
TOTAL ASSETS 25,109.0 10.6% 26,629.5 8.4% 21,228.9 8.5%
LIABILITIESWon Currency
Deposits 11,326.1 9.9% 11,855.1 7.1% 11,466.9 6.7%Debts 3,655.2
9.9% 2,895.7 9.0% 2,298.7 7.4%
Other Liabilities 1,103.7 30.7% 648.1 19.8%Foreign Currency
Deposits 7,200.0 9.4% 3,668.3 6.2% 2,626.8 5.2%Debts 2,016.7
6.6% 5,710.7 6.3% 5,201.7 5.8%
Other Liabilities 45.1 10.7% 1,115.7 5.0%TOTAL LIABILITIES
25,346.8 10.4% 25,893.6 7.2% 21,594.1 6.3%
Source: Korea First Bank Annual Reports; 1997, 1998
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EXHIBIT 12
Korea First Bank
Net Interest Income (In billion of Korean Won)
1998 1997 1996
Exchange Rate 1204 1600 841
(Korean won to US Dollar as of year end)Interest Income
Won Currency Loans 1,223.3 1,186.1 1,034.8 Foreign Currency
Loans 370.2 447.6 350.9
Won Currency Securities 395.7 261.1 273.8 Foreign Currency
Securites 32.2 52.1 44.4
Call Loans 122.4 30.9 11.6 Due from banks 183.3 88.5 92.4
Other Interest Income 337.4 182.9 180.0 Total Interest Income
2,664.5 2,249.2 1,987.9
Interest ExpenseWon Currency Deposits 1,125.1 842.6 762.8
Foreign Currency Deposits 679.7 228.4 135.5 Won Currency Debts
360.2 259.5 170.9
Foreign Currency Debts 133.1 362.1 302.1 Call Money 152.5 127.5
76.4
Other Interest Expenses 190.9 56.8 40.0 Total Interest Expense
2,641.5 1,876.9 1,487.7
NET INTEREST INCOME 23.0 372.3 500.2
Source: Korea First Bank Annual Reports; 1997, 1998.
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EXHIBIT 13
Korea First Bank
Maturity Gap (in billions of Korean Won, except for Foreign
Currency exposure which is in US dollars)
Data as of 12/31/98
Within 3 mos. 3mos - 6mos. 6mos. - 1year Over 1yr Total
BANKING ACCOUNTS 5,938 7,945 21,382 Won Currency 6,636 9,454
21,382
rate sensitive assets 4,748 1,190 2,007 13,437 21,382
rate sensitive liabilities 5,287 1,349 2,818 11,928 21,382
accumulated gap (539) (698) (1,509) - -
accumulated assets/liabilities 89.8% 89.5% 84.0% 100.0% -
3,538 4,589 5,269 7,368 Foreign Currencies 5,452 6,429 6,543
7,368
rate sensitive assets 3,538 1,051 680 2,099 7,368 rate sensitive
liabilities 5,452 977 114 825 7,368
accumulated gap (1,914) (1,840) (1,274) - - accumulated
assets/liabilities 64.9% 71.4% 80.5% 100.0% -
4,065 5,026 6,488 8,828 TRUST ACCOUNTS** 1,774 2,746 4,175
8,828
rate sensitive assets 4,065 961 1,463 2,340 8,828 rate sensitive
liabilities 1,774 971 1,429 4,654 8,828
accumulated gap 2,291 2,280 2,314 - - accumulated
assets/liabilities 229.1% 98.9% 102.3% 50.3% -
** Trust accounts with guaranteed principal and/or interest
Source: Korea First Bank Annual Reports; 1997, 1998.
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EXHIBIT 14 Korea First Bank Equity Volatility US Financials
Korea Financials KFB 1998 25.46% 71.79% 174% 1997 18.49% 59.83% 77%
1996 13.98% 25.15% 36% 1995 10.93% 29.18% 35% 1994 11.37% 30.96%
33% Source: Yahoo Finance
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FIGURE 1
Korean Total Market Index (KOSPI)
0
200
400
600
800
1000
1200
Jan-9
6
Mar-9
6
May-9
6Ju
l-96
Sep-9
6
Nov-9
6Ja
n-97
Mar-9
7
May-9
7Ju
l-97
Sep-9
7
Nov-9
7Ja
n-98
Mar-9
8
May-9
8Ju
l-98
Sep-9
8
Nov-9
8
Korea First Stock Price (in Korean Won)
0100002000030000
40000500006000070000
80000
Jan-9
6
Mar-9
6
May-9
6Ju
l-96
Sep-9
6
Nov-9
6Ja
n-97Ma
r-97
May-9
7Ju
l-97
Sep-9
7
Nov-9
7Ja
n-98
Mar-9
8
May-9
8Ju
l-98
Sep-9
8
Nov-9
8
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FIGURE 2
Normalized Market Value Comparison
0
20
40
60
80
100
120
Jan-97
Mar-9
7
May-9
7Ju
l-97
Sep-9
7
Nov-9
7Ja
n-98
Mar-9
8
May-9
8Ju
l-98
Sep-9
8
Nov-9
8
Finance Index Korea First Total Market Index
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FIGURE 3
Relative Performance of Korean Industry Specific Stock
Indices
020406080
100120
Dec
-95
Feb
-96
Apr
-96
Jun-
96
Aug
-96
Oct
-96
Dec
-96
Feb
-97
Apr
-97
Jun-
97
Aug
-97
Oct
-97
Dec
-97
Feb
-98
Apr
-98
Jun-
98
Aug
-98
Oct
-98
Dec
-98
Construction Chemicals Textile/Apparel Transports
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FIGURE 4
Normalized Country Prime Rate Comparison
0
20
40
60
80
100
120
140
Jan-9
6Ap
r-96
Jul-9
6Oc
t-96
Jan-9
7Ap
r-97
Jul-9
7Oc
t-97
Jan-9
8Ap
r-98
Jul-9
8Oc
t-98
United States
Honk Kong
Australia
Korea
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FIGURE 5
Normalized Asia Pacific Currencies (vs. US Dollar)
0
50
100
150
200
250
Jan-9
6
Mar-9
6
May-9
6Ju
l-96
Sep-9
6
Nov-9
6Jan
-97Ma
r-97
May-9
7Ju
l-97
Sep-9
7
Nov-9
7Jan
-98Ma
r-98
May-9
8Ju
l-98
Sep-9
8
Nov-9
8
JapaneseYen
Korean Won
Hong KongDollar
TaiwanDollar
Thai Baht
MalaysianRiggit
SingaporeDollar