Hana Financial Group 2015 1H Business Results

Thanks for taking part in the Hana Financial Group Business Results Presentation. I am Lee Junghoon from Hana Financial Group, Head of IR Team. Thank you to our shareholders, analysts and other market participants for joining in today’s earning release via phone or the Internet. Let us now begin the 2015 Q3 Hana Financial Group business results presentation.

I’d like to introduce our Group’s management who are here with us before the business results presentation. First, Hana Financial Group CFO, Kwark Cheol-seung is here with us. Hana Financial Group CRO, Hwang Hyo-sang is also here with us. From KEB Hana Bank, CFO, Kwon Tae-gyun is here with us; Hana Financial Investment SEVP, Byun Jae-yeon, is also here with us. Last but not least, Hana Card EVP Song Jong-geun is here with us. We will first hear the earnings presentation about our 2015 Q3 results and then have a Q&A session via phone.

I’d like to invite Hana Financial Group CFO, Kwark Cheol-seung to deliver 2015 Q3 earnings results.

Important Management Notice

Dear investors and analysts, I am Kwark Cheol-seung, the CFO of Hana Financial Group.

I would like to make a few announcements pertaining to the group subsidiaries before the business results presentation.

As of September 1st 2015, Hana Bank and KEB integrated launching KEB Hana Bank. Accordingly, in the 2015 financial data of KEB Hana Bank, which is the integrated entity, the performance of the former KEB, which is the surviving entity, from January to August 2015 as well as, the integrated bank, KEB Hana Bank’s September monthly performance are included.

The financial data of the past is provided for convenience in comparison, and is the simple sum of the former Hana Bank and former Korea Exchange Bank’s performance data. For your reference, there are no changes to the group’s earnings materials because of the bank integration.

In addition, Hana Daetoo Securities has been renamed as Hana Financial Investment on September 1st, 2015. Hana Card integration has been concluded as of December 1st, 2014. The financial data on the former Hana SK Card and former KEB Card, provided for convenience in comparison, is the simple sum of former Hana SK Card and former KEB Card’s performance data before and after the two credit card companies’ integration for your reference.

Now let me walk you through 2015 Q3 earnings of the Group.

P.5 2015.3Q Financial Highlights (1)

These are the 2015 Q3 Group financial highlights. Please refer to page five.

Hana Financial Group’s 2015 Q3 accumulated net income posted 13.1% increase YoY, posting KRW 1,002.3 billion. 2015 Q3 net income recorded KRW 253.4 billion, a 32.4% drop QoQ.

A major characteristic of 2015 Q3 is the sound loan asset growth and strong NIM flow, leading to an increase in bank interest income. However, with the group interest income consolidation adjustment and fee income downturn following the increase in the stock market volatility, Group’s core earnings consisting of interest income and fee income dropped 2.8% QoQ.

General operating income declined 21.5% with approximately KRW 104.8 billion of FX translation losses, and also because sale of Korea Housing and Urban Guarantee Fund (KHUG) shares and other one-off marketable securities (disposition gains) did not take place in this quarter. In addition, with the Hana Bank and KEB integration on September 1st, approximately KRW 102.6 billion of integration cost occurred, and thus a recurring level of net income was not realized.

On the other hand, Taihan Electric Wire, of which KEB Hana Bank is the main creditor, was sold to a PEF, leading to a provisioning write-back. Accordingly, some general asset quality indicators, including credit cost and NPL ratio improved. For your reference, pre-tax income impact related to the sale of Taihan Electric Wire totaled KRW 87.2 billion, setting off a large portion of the FX translation losses following the foreign exchange rate drop.

P.6 2015.3Q Financial Highlights (2)

Please refer to page 6, first the NIM.

Hana Financial Group’s 2015 Q3 NIM stood at 1.80% in line with the prior quarter. Despite the base rate cut in March and June, a stable NIM flow took place with improvement in the funding structure, including growth of core deposits and contraction of time deposits. As you can see on the bottom right-hand side of the slide, bank loans in won increased 4.0% YTD and 1.0% QoQ.

Large corporate loans decreased and SME and household loans grew, showing profitability-centered portfolio improvement efforts are continuing. Fee income, with drop of 2015 Q3 credit card fees and asset management related fees, declined 5.6% QoQ. However, it showed an even growth for each item, going up 11.3% YoY. Core earnings, our sum of interest income and fee income, as of 2015 cumulative basis at the end of 3Q 2015, maintained a level similar to that of last year.

P.7 2015.3Q Financial Highlights (3)

Next, let’s go to page 7.

2015 Q3 Group NPL ratio stood at 1.19% and delinquency ratio of 0.70%. Group’s cumulative credit cost ratio as of late 2015 Q3 recorded 0.41%, a 12bp drop QoQ.

All asset quality related indicators including 2015 Q3 NPL ratio and credit cost ratio improved, and this was due to the KRW 113 billion of provisioning write-backs stemming from the sale of Taihan Electric Wire, which KEB Hana Bank was the main creditor bank as well as the asset quality reclassification of KRW 400 billion of Taihan Electric Wire exposure from NPL to normal. With no credit event related to large corporations in 2015 Q3, Group’s 2015 Q3 provisioning went down KRW 250 billion to KRW 108 billion, as you can see, on the bottom left-hand side of the graph.

2015 Q3 CET1 ratio is expected to post 9.56%, a 12bp increase QoQ with expected increase in retained earnings and through maintaining adequate RWA.

P.9 Group Consolidated Earnings

The next is the breakdown of Group’s profitability. Please refer to Group’s consolidated income statement on page 9.

Let me elaborate on Group’s general operating income. Group’s interest income in the general operating income only declined 4.2% YoY despite the NIM drop, due to the portfolio adjustment through continuous SME loan growth as well as mortgage-based household loan growth. In particular, Group’s interest income went down KRW 36 billion, a 1.6% drop QoQ with Hana Financial Investments’ PEF-related interest income adjustment. Bank’s interest income representing the recurring interest income, which excludes one-off items, continued an upward trend since 1Q 2015 with an increase of interest earning asset average balance growth on the back of loan growth as well as the stable NIM flow.

Fee income, with fund inflow to securities related asset investment as the low interest rate environment being maintained, grew 11.3% YoY on the back of increase in brokerage commissions related to the increase in security fees and securities linked trust products, but on QoQ basis, due to credit card fee income decline and asset related fee income drop, went down 5.6%.

2015 Q3 Group’s disposition and evaluation gains grew 31.5% YoY, but dropped 94.2% QoQ. As per one-off items in 2015 Q3, there was KRW 104.8 billion of FX translation losses with the depreciation of the won. KRW 186.9 billion of one-off gains including KRW 50.1 billion of SK Hynix share disposition gains and KRW 136.8 billion of KHUG share disposition gains that took part in the previous quarter did not occur in 2015 Q3, which led to a large volatility QoQ.

2015 Q3 Group’s SG&A showed a relatively high growth, posting 9.0% YoY and 7.7% QoQ. This was due to the integration costs following the bank integration on September 1st 2015, and it is expected that SG&A growth due to integration costs will likely to continue until Q4 of this year. 2015 Q3 Group’s credit loss provision, including provisioning, went down 9.1% YoY and 62.2% QoQ with the prior quarter’s KRW 100 billion of large corporation related provisioning factors not taking place in this quarter, and also because of the aforementioned Taihan Electric Wire provisioning write-back impact, following the M&A disposition.

P.10 Business Results of Subsidiaries

Next, page 10, the business result of subsidiaries.

Group’s major subsidiary, KEB Hana Bank’s 2015 Q3 cumulative net income posted KRW 447.1 billion, a 0.9% drop YoY and 97.7% increase QoQ. For your reference, KEB Hana Bank, which integrated KEB Bank as the surviving entity with Hana Bank on September 1st 2015, the surviving entity, former KEB’s net income from January 2015 to August 2015 as well as the monthly (September) earnings of KEB Hana Bank consists of the cumulative 2015 Q3 KEB Hana Bank net income. Accordingly, simple summation of the net earnings of the former Hana Bank and the former KEB on a separate basis is in the former Hana Bank plus former KEB Bank column. So please take this into reference.

In the case of Hana Financial Investment, 2015 Q3 cumulative net income, with the increase in equity sales, IB related fees and marketable securities disposition and evaluation gains, rose 77% YoY. However, on QoQ basis, with less equity sales, following the stock market volatility expansion, 2015 Q3 cumulative net income went down 32.7%.

KEB Hana Card, after going into the black in 2015 Q2, currently has KRW 25.4 billion of cumulative net income as of end 2015 Q3. Hana Capital, Hana Life Insurance and Hana Savings and Loan Bank’s 2015 Q3 cumulative earnings, as you can see in the material, have gone up by a great leap YoY, but their contribution to Group earnings are not very high.

P.11 NIM

Moving on to page 11, Group’s NIM.

The 2015 Q3 NIM for Group, including the bank and card businesses, stood at 1.80%.

KEB Hana Bank’s NIM for the quarter fell 1 basis point QoQ to 1.39%. While Group’s total NIM remained at a similar level to the previous quarter. This year’s rate cuts in March and June are expected to continue to have a downward pressure on the 2015 Q4 NIM. However, improvements will be made to the funding structures such as increasing low-cost core deposits and managing time deposits so as to prevent the NIM from falling further. With the launch of Hana Membership, which is an integrated FinTech membership service, we are making preparations for the account switching system. We also expect an increase in the core deposits enabled by a larger customer base.

P.12 Non-Int. Income/ SG&A Expenses

Page 12, non-interest income and SG&A.

Group’s non-interest income grew 24.7% YoY and decreased 51.6% QoQ. The 2015 Q3 non-interest income looks mediocre because the one-off gain related to securities recognized during 2015 Q2 disappeared, and also because of reduced fee income and FX translation losses due to a weak won in 2015 Q3. For your reference, with the strong appreciation of the won toward the end of 2015 Q3, if the FX fate continues its current trend, albeit difficult to be certain at this moment, it is likely that most of the FX translation losses in 2015 Q3 can be recovered in 2015 Q4.

Group’s SG&A increased 9% YoY, of which salary and benefits, due to bonus payments and profit sharing due to integration, showed a significant growth rate due to the temporary rise in the post-merger integration cost. As you can see from the graph on the bottom, the CIR in 2015 Q3 recorded 61.4%, up 5.2 percentage point QoQ.

P.14 Group Total Assets/ Total Liabilities & Equity

Page 14, Group’s total assets, liabilities and equity.

As of end of 2015 Q3, Group’s total assets recorded KRW 334.6 trillion and the number goes up to KRW 410.3 trillion if the trust asset of KRW 75.6 trillion is included. Of these, KEB Hana Bank’s assets including trust assets amount to KRW 337 trillion. Group’s total liability is KRW 311.6 trillion, and total equity is KRW 23.1 trillion.

P.15 KEB Hana Bank KRW Loan / Deposit

Page 15, KEB Hana Bank’s loans in won and deposit.

2015 Q3 loans in won rose 4.0% YTD and 1.0% QoQ respectively to KRW 170 trillion.

Loans by category: large corporation loans decreased 14.7% YTD to KRW 22 trillion whereas SME loans increased 8.3% YTD to KRW 56.5 trillion. Portfolio adjustments, which had started in 2014, helped to reduce the large corporation loans, at the same time, increasing SME loans including SOHO loans. The expected benefits from the adjustment in the loan portfolio are several folds. Potential large corporation related credit cost can be reduced for won. As SME loans increase, there are more opportunities for cross-selling and opening up settlements type accounts so that it can lead to a higher fee income and more core deposits. It is our plan to offset the slowed asset growth caused by decreased corporate loans with higher profitability.

Household loans increased 7.6% YTD to KRW 85 trillion on the back of 12.7% increase YTD in the mortgage loans.

Deposits amounted to KRW 194 trillion, up 2% YTD. Core deposits grew 13.9% YTD whereas time deposits reduced by 8.6% YTD showing sound improvements in the funding structure.

P.17 Group Asset Quality

Page 17, Group’s asset quality.

Group’s total credit at the end of 2015 Q3 stood at KRW 236.2 trillion, of which NPL amounts to KRW 2.8 trillion. Total credits increased 2.3% YTD and NPL decreased 9.8% YTD. This brought down the NPL ration to 1.19% this quarter, a 16 basis point drop YTD.

The top right graph shows Group’s new NPL formation. In other words, the total NPL that increased prior to bad debt sale write-off and debt equity swap during 2015 Q3. It is way below at minus KRW 173 billion, thanks to reclassification of KRW 400 billion of Taihan Electric Wire exposure going from NPL to normal and the overall new default situation being stabilized.

Bank’s asset quality will be mentioned on page 18.

P.18 KEB Hana Bank Asset Quality

KEB Hana Bank’s total credit grew 1.6% YTD to KRW 211.8 trillion, and NPL decreased by 11.9% YTD to KRW 2.3 trillion bringing down the NPL ratio to 1.08% down by 0.17 percentage point YTD and NPL coverage ratio increased 18.4 percentage point YTD to 138.5%.

KEB Hana Bank’s delinquency ratio in 2015 Q3 was stable at 0.55%.

Page 19 Provision Analysis

Page 19, Group provisioning. Group’s credit cost fell 12 basis point QoQ to 0.41% and KEB Hana Bank’s credit cost, calculated based on the bank’s loan loss provisions, recorded 0.34%.

P.20 Capital Adequacy

Last, capital adequacy on page 20.

Estimated BIS and Tier 1 ratios for Group are 12.79% and 10.09% respectively. Group’s common equity Tier 1 ratio is expected to reach 9.56%, 38 basis point increase YTD and 12 basis point increase QoQ.

Please refer to the Appendix for further details.

This concludes Hana Financial Group’s 2015 Q3 Business Results Presentation. Thank you.