Hana Financial Group 2015 1Q Business Results

Thank you for taking part in the 2015 Q1 Hana Financial Group Business Results Presentation. I am Lee Jung-hoon from Hana Financial Group IR Team.

Thank you, shareholders. I'd like to ask for your understanding because of the slight delay that we have had. Thank you, shareholders, analysts and other market participants for joining in today's earnings release via phone or the internet.

Let us now begin the 2015 Q1 Hana Financial Group Business Results Presentation.

Let me first introduce the group management who are here with us.

From Hana Financial Group, we have our CFO & Executive Vice President, Kwark Cheol-seung, and CRO & Executive Vice President, Hwang Hyo-sang.

From Hana Bank, Senior Executive Vice President, Park Hyung-jun, Chief Financial Officer, and Senior Executive Vice President and Chief Risk Officer, Ko Hyung-seok .

From KEB, CFO & Senior Executive Vice President, Kwon Tae-gyun, and Senior Executive Vice President & Chief Risk Officer, Chung Kyung-sun is here.

From Hana Daetoo Securities, Executive Vice President, Byun Jae-yeon, and finally from KEB Hana Card, Strategy & Planning Division Head, Song Joon-geun.

We will first hear the 2015 Q1 business results presentation and then have the Q&A session via phone.

Now I would like to invite our CFO, Executive Vice President, Kwark Cheol-seung to deliver the 2015, Q1 Hana Financial Group earnings presentation.

Good afternoon. I am Hana Financial Group CFO, Kwark Cheol-seung. Let me now walk you through to group business results for 2015, Q1.

Let me now begin.

First the Group's financial highlights for 2015 Q1.

Please refer to page four.

P.4 2015.1Q Financial Highlights (1)

Hana Financial Groups net income for Q1 increased 94% YoY to reach KRW 373.8 billion. During the Q1 of 2014 one-off losses of at KRW 130 billion was incurred due to impairment losses of NHF (The National Happiness Fund), and the provisioning for KT ENS. However, in Q1 of this year, fee income and gains from valuation of trade securities rose. While provision declined so that on a quarterly basis we have achieved the highest net income since Q2 of 2014.

As such, the Group's ROE and ROA is 7.11% and 0.49% respectively, and group’s cost-income ratio is 58.7%.

P.5 2015.1Q Financial Highlights (2)

Moving on to page five.

First NIM.

Hana bank and KEB and Hana Card all combined, the group's 2015 Q1 NIM fell 5bps over the previous quarter to stand at 1.83%. The effect of the previous year interest rate cut continues to be felt, and despite the fall of interest income on the back of first quarter’s calendar day effect. Growth and profitable loans including SME loans and increase in core low interest deposits has led to portfolio improvements. So that the decline in interest income was not more than 3.2% compared to previous quarter, and Hana Bank and KEB combined, the bank loan growth rate increased by 1.5% QoQ, showing sound asset growth trend.

The fee income showed even growth across trust fees, brokerage commissions, and underwriting and M&A fees, so that on a YoY basis 12.9% and on a QoQ basis 1.3% growth was achieved, posting the highest in record on a quarterly basis.

P.6 2015.1Q Financial Highlights (3)

Next, page 6. As of the end of Q1 2015, the gross NPL ratio and the delinquency rate rose 6 bps and 5 bps respectively QoQ to reach 1.41% and 0.67% each. The NPL ratio is up because, although the size of new NPL is quite limited, write-offs fell 34% YoY. And in case of the delinquency rate, there was a time lag in the recognition in the delinquency data of Moneual exposure, for which provisioning has been completed by the end of last year. So, this led to the rise in KEB's delinquency rate. With the fall in new defaults, the provision for credit cost stabilized, and so the credit cost posted 0.45%.

P.8 Group Consolidated Earnings

Next, let me provide you with more details of the group's business results by item. First, please refer to the group's consolidated earnings on page eight.

Let me start with the group's general operating income. The interest income despite the policy rate cut fell only 2.1% YoY owing to the adjustment of the portfolio driven by the SME loan growth, and due to the increase in core deposits.

Fee income rose 12.9% YoY and 1.3% QoQ on the back of rising trust fees from strong sales of the equity-linked trust products and the increase of brokerage fees from growing share agreements.

As a result, the core operating income, which combines fees and interest income, rose 1.9% YoY continuing a healthy trend. The Q1 disposition and valuations increased 546.6% as the aforementioned one-off lawsuit was taken care of.

Special one-off factors in the Q1 are the recognition of KRW 12.1 billion won in impairment loss of POSCO shares and the KRW 26.8 billion in FX translation gains, and with the rally in the stock and bond markets gain and valuation of trading securities also showed a growth trend. Now to sum it up, the strong fee income and gains on valuation growth had led to the general operating income of the group in Q1 to rise 14.5% YoY and 12.6% QoQ.

The SG&A in Q1 fell 11% QoQ as the seasonal factors that were at play during Q4 ended. But on a YoY basis due to one-off factors such as the rise in labor cost mainly the bonus payout of the Hana Daetoo Security and integration costs of KEB and Hana Card led to 7.4% increase of SG&A, YoY.

P.9 Business Results of Subsidiaries

Next page nine, business results of subsidiaries.

The Q1 net income of the Hana Bank, the chief subsidiary of group, posted KRW 260.8 billion, a fall of 6.5% YoY. The core operating income consisting of interest income and fee income rose, and gains from valuation of trading securities were also up, and loan loss provisions were down. However, because of the base effect caused by one-off gain of KRW 113 billion coming from the integration of the Indonesia subsidiary last year, the net income fell KRW 18.2 billion YoY. For your information, the gains from the integration in Indonesia went unrecognized in consolidated earnings.

In the case of KEB, the net income grew 73% YoY to reach KRW 122.1 billion due to FX translation gains of KRW 27.4 billion. Non-operating income of KRW 24.6 billion from Samsung Motors litigation, altogether coming to a total of KRW 52 billion in one-off gains.

In the case of Hana Daetoo Securities, the Q1 net income reached KRW 42.5 billion growing 227% YoY, due to an increase in brokerage fees riding on the back of a strong stock market and the growth in IB fees, gains and valuation of trading securities.

For Data on other subsidiaries, please refer to the presentation material.

P.10 NIM

Next page 10, the Group's NIM.

The Group's NIM, Q1 which combines Hana Bank KEB, and KEB Hana Card was 1.83%.

In Q1, Hana Bank and KEB NIM both fell by 3 bps QoQ, and the Group's NIM fell 5 bps QoQ. If one looks at the recent trends, we hit bottom in January, and in February & March, NIM has been back on a growth trend. But during Q1, due to additional of policy rate cuts and the initiation of the new housing loan program, we believe it will be difficult to improve the NIM for the time being. So going forward to continue its adjustments Q2 toward a more profitable asset liability portfolio. We will do our best to minimize the NIM correction period.

P.11 Non-Int. Income/ SG&A Expenses

Next, page 11, non-interest income and SG&A.

In Q1 of 2015 the Group's non-interest income reached to KRW 552.5 billion up 74.7% YoY.

Fee income was up 12.9% YoY KRW 466.9 billion, and within fee income, the credit card fee rose 2.9% YoY from growth in sales and the asset management fees rose 28% YoY, due to rise in trust fees and brokerage commissions from the back of strong sales in equity linked product. Underwriting in M&A fees also grew due to higher fee income from IB segments.

SG&A grew 7.3% YoY and the KRW 11.4 billion cost related to Hana card integration and KRW 12.4 billion in bonus payment of Hana Daetoo Securities were all one-off costs, so in consideration, the growth in SG&A is being managed at an appropriate level. Despite the growth in SG&A in Q1, as you can see in the graph on the bottom right, cost income ratio in Q1 at 2015 was down 4%p to 58.7% YoY, due to improvement in general operating income performance.

P.13 Group Total Assets/ Total Liabilities & Equity

Next on page 13, the group’s total assets and liabilities are described.

As of Q1 of 2015, the total asset of the group is KRW 321.6 trillion and with trust asset of KRW 74.4 trillion, the number goes up to KRW 396.1 trillion. Hana bank and KEB's total assets, with the trust assets, stand at KRW 192 trillion and KRW 146 trillion respectively.

The group’s total liability is KRW 299.2 trillion, and its shareholders' equity is KRW 22.4 trillion.

P.14 Hana Bank KRW Loan/ Deposit

Hana bank KRW loans and deposits are described on the page 14.

As of Q1 of 2015, Hana bank’s loan balance in Korean Won is KRW 111.2 trillion, 1.9% increase YoY and 0.3% increase QoQ.

Let's look at the loans and deposits in more detail.

Loans to large corporations came in at KRW 14.1 trillion, 8.5% drop on QoQ, while loans to SMEs increased 2% QoQ to KRW 37.4 trillion. As 2014, in line with the portfolio adjustment policy, exposures of Tier 2 large corporations and less profitable large corporations were decreased. However, loans to SMEs including SOHO continue to grow.

Loans to households grow to KRW 58.6 trillion, up 1.6% QoQ thanks to increase in mortgage loan of 3.3% QoQ.

Deposits dropped of 3.1% QoQ and came at KRW 117.1 trillion. In particular of KRW deposits, in low interest core deposits increased 5.1% QoQ, but time deposit, a high cost funding source, dropped 7.7% from the previous quarter resulting in healthier funding structure.

P.15 Korea Exchange Bank KRW Loan/ Deposit

Page 15 covers KEB's loans and deposits in Korean Won.

KEB’s KRW loan in Q1 of 2015 was KRW 54.6 trillion, up 5.1% YoY and 3.9% QoQ. Now let’s look at in more detail.

Loans to large corporate dropped 1.3% QoQ to stand at KRW 10.2 trillion, while loans to SMEs saw an increase of 5.3% QoQ to KRW 20.9 trillion.

Household loans were up 5.8% QoQ to KRW 22.6 trillion, thanks to increase in mortgage loans.

Deposits grew to KRW 70.4 trillion of 1.4% from the previous quarter. As was the case with Hana Bank, funding structure improved with low interest-bearing deposits increase of 0.5% while high interest-bearing time deposits decreasing 3.3%.

P.17 Group Asset Quality

Next on page 17, let's look at group’s asset quality.

Total credit of the group in the first quarter of 2015 recorded KRW 231 trillion, NPL amounted to KRW 3.3 trillion, total credit grew up 0.1% from the previous quarter while NPL amount grew 4.3% QoQ. In Q1 of 2015 the group’s NPL increased before write-off, sale, and debt equity swap, or new NPL was KRW 365 billion.

New NPL of KRW 51.7 billion was generated due to the workout of Dongbu Metal. New NPL for the first quarter was slightly above the normal quarterly level, however, thanks to sufficient collateral that have been made, there was no additional provisioning needed. Combined new NPL increase for Hana Bank and KEB was KRW284.3 billion. New NPL for the rest of the subsidiaries increased by KRW 80.7 billion.

For Q1 of the year, NPL ratio and NPL Coverage ratio for the group stand at 1.41% and 120.1% respectively.

I will go over asset quality in more detail on the following pages.

P.18 Hana Bank Asset Quality

Page 18 covers Hana Bank Asset quality.

Hana Bank’s total assets, in the total of credit in the first quarter of 2015, was KRW 127 trillion, NPL increased 5.4% QoQ to KRW 1.6 trillion. As a result, its NPL ratio rose 6%p on QoQ to 1.24%, and NPL coverage ratio dropped QoQ 6.1% to 124.9%. Hana Bank’s delinquency ratio, due to reduction in sale and write-off, increased 2%p to 0.47%.

P.19 Korea Exchange Bank Asset Quality

Now on page 19, KEB’s asset quality.

KEB’s total credit for Q1 of the year was KRW 82 trillion, and its NPL increased by 2.5% QoQ to KRW 1.1 trillion, so the NPL ratio increased 3%p QoQ to 1.39%, NPL coverage ratio also increased 1.9%p to 107.3%.

KEB’s delinquency ratio went up 0.12%p from the previous quarter, and recorded 0.56%. As was mentioned before, the exposure on Moneual was included in the delinquency ratio. However, provision had already been made in the previous quarter; therefore there is no additional impact on profit and loss of the bank.

P.20 Provision Analysis

On page 20, we have provision.

Credit cost for the group in the first quarter of the year, dropped 0.06%p to 0.45% from the previous quarter. Hana Bank and KEB recorded 0.25% and 0.60% of the credit cost respectively.

Loan loss provision for Q1 at the group level dropped KRW 37.1 billion YoY to record KRW 255.6 billion, as there is no one-off loss that had occurred in the first quarter of last year.

P.21 Capital Adequacy

The Last page 21 looks at capital adequacy.

Hana Financial Group’s expected BIS ratio and Tier 1 ratio are 12.59% and 10.0% respectively.

Group’s CET1 ratio is expected to increase 0.69%p YoY and 0.36%p QoQ to 9.54%. Capital adequacy is continuously improving thanks to increased retained earnings and better management of RWA. Through selective asset increase, we will continue to improve portfolio structure so as to ensure our capital efficiency, and better (healthier) CET1.

Please refer to the attachment for more detailed information on respective subsidiaries and major management indicators.

This concludes the presentation Hana Financial Group earnings for the first quarter of 2015. Thank you.

Q&A session

Thank you. Next we will hold the Q&A session.

First, let me give you a brief explanation how we will proceed.

To take a part on 2015Q1 earnings presentation conference call, you can call us here at phone number we have provided to you in advance, or visit our website through internet connection, you can listen into the presentation and Q&A. For those of you participate through internet, you need to connect again via the telephone in order to ask a question.

For those of you, listening through internet, if you have any question, you can dial area code “031”, “810-3068”, and following the voice instruction, please press the passwords “4328” and then ask questions.

When you ask a question, please press star (*) button, and then number “1”. And if you want to cancel your question, you can press number “2”.

For our foreign investors, the phone number is country code and area code “82, 31”, and then call “810-3069”, and then press password “7049”. If your question is in English, consecutive translation will be provided, so the person who is asking the question needs to wait for the interpretation before the answer is given.

We will now receive questions.