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Hana Financial Group 2015 1H Business Results

Thank you for taking part in 2015 1H Hana Financial Group business results presentation. I am Lee Jung-hoon from Hana Financial Group IR Team.

Thank you, shareholders, analysts and other market participants who are joining in today's earnings release via phone or the internet.

And let us now begin the 2015 1H Hana Financial Group business results presentation.

Let me first introduce the group management who are here with us to answer your questions.

Hana Financial Group CFO, Kwark Cheol-seung, is here with us today. Hana Financial Group CRO, Hwang Hyo-sang, is also here with us today. Also here with us today, Hana Bank Planning & Management Senior Executive Vice President, Park Hyung-joon, and Hana Bank Risk Management Group Senior Executive Vice President, Ko Hyung-Seok, are here.

And from KEB, Planning & Management Group Senior Executive Vice President, Kwon Tae-gyun, and KEB Risk Management Group Senior Executive Vice President, Chung Kyung-sun, are here. And last but not least, KEB Hana Card Executive Vice President, Song Jong-geun, is here with us.

We will first hear the 2015 1H business results presentation, and then have a Q&A session via phone.

Now, let me invite 2015 1H Hana Financial Group earnings presentation by our CFO, Kwark Cheol-seung.

It's great to be here. I am Kwark Cheol-seung, the CFO of Hana Financial Group. I'd like to walk you through the 2015 Hana Financial Group 1H business results presentation.

Let's first go to page four, 2015 1H group financial highlights.

P.4 2015.1H Financial Highlights (1)

On page four, you can see Hana Financial Group during the first half 2015 posted KRW 748.8 billion of net income, a 22.7% increase YoY. Q2 net income recorded KRW 374.9 billion, a 0.2% growth QoQ. The main highlight of Q2 was a relatively large increase of fee income. Also, the interest income stopped its downward trend, leading to an increase of core earnings, a combination of interest income and fee income. Hana Daetoo Securities, KEB Hana Card, Hana Life Insurance and other non-banking subsidiaries contribution to group income grew, offsetting the stagnant banking profits, leading to a positive portfolio effect on the whole group. Also through the realization of Hana Bank and KEB’s gains from securities and loan disposals, despite the increase in FX translation losses and provisioning, the level of income was at the level of the previous quarter.

The group's first half ROE and ROA each achieved 7.02% and 0.48%, respectively, and the group's cost income ratio recorded 56.2%.

P.5 2015.1H Financial Highlights (2)

Let's now go to page five.

First, the net interest margin or NIM.

Hana Bank, KEB and KEB Hana Card, in total, recorded a group 2015 Q2 NIM of 1.80%, a 3-bp drop QoQ. This was caused by the continuing effect of BOK interest rate decline and the KRW 15 billion of loan transfer cost from the housing loan conversion program being taken out of interest income in 2Q of 2015. On the other hand, Q2 interest income increased 0.9% QoQ, thanks to the profitability focused loan growth, including SME loan and HF (Korea Housing Finance Corporation) mortgage loan growth, as well as the portfolio improvement, thanks to core low cost deposits.

As you can see on the bottom right graph, Hana Bank and KEB’s bank loan in won growth rate increased 1.5% in late Q2, QoQ. There was a continuous decrease of large corporate loans in Q2 with the housing loan conversion program for KRW 4.2 trillion. But as previously mentioned, asset growth was sound through HF mortgage centered household loans and SME loan growth. For your reference, the loan conversion program had approximately 2.5% minus level impact on the loans in won balance in late Q2.

Fee income showed an overall balance growth rate for each category and increased 12.6% YoY and 8.1% QoQ surpassing KRW 500 billion per quarter, and continued a high growth rate. You can see that in Q2, fee income was the highest among the five previous quarters.

P.6 2015.1H Financial Highlights (3)

Let's now go to page six.

In the third highlight of the first half of 2015, you can see the 2015 Q2 group NPL ratio, which recorded 1.41%, and delinquency rate posted 0.66%. Group credit cost on a cumulative level as of end second quarter posted 0.53%, an 8bp increased QoQ. This was caused by certain one-off items, including some large corporation restructurings and additional provisioning by shipbuilders caused by conservative risk management policy.

Through continued risk management of large exposure borrowers, Hana Bank and KEB Bank's delinquency rate is being maintained at a stable level, pushing down the NPL amount compared to last year. In the second half, asset quality indicators including NPL ratio and credit cost is expected to improve from 2014. We are doing our best and we expect better results. Group CET1 ratio is expected to post 9.42%, an 8bp in decline QoQ following the RWA increase with the preemptive grading adjustment of shipbuilders as well as mid-year dividend.

P.8 Group Consolidated Earnings

Let's now go to page eight.

I will cover the group's business performance by category. I will go into details for the results. So please take a look at the group's consolidated earnings. Let me begin with the group's general operating income. The group's interest income out of the group's general operating income despite the margin decline caused by the portfolio adjustment by SME loan growth and mortgage focused household loan growth stopped at 3.2% drop YoY, and actually increased 0.9% QoQ.

Fee income showed growth in fund flow of securities related asset investments since the low interest rate is being maintained. With the increase in security fee income, and the increase in brokerage commissions with the high sales of securities related trust products, fee income rose 12.6% YoY and 8.1% QoQ, respectively. The first half gains from disposal on valuation increased 104.4% YoY and 44.3% QoQ, respectively.

A notable point in Q2 was that KRW 40.8 billion of FX translation losses following the weak won in Q2. However, with the non-recurring securities disposal gains, including the recognition of KRW 50.1 billion of SK Hynix securities disposal gains that KEB had been holding as well as the KRW 138.6 billion of Korea Housing Urban Guarantee Corporation securities that Hana Bank had been holding, this led to a higher growth of Q2 disposition gains even after offsetting the one-off losses.

The first half SG&A expenses increased 6.7% YoY and 3.3% QoQ. Excluding KEB Hana Card integration cost and Hana Daetoo Securities profit-linked performance pay, SG&A is showing an increase within an appropriate range. In the first half provisioning, due to KRW 104.6 billion of one-off provisioning items, including KRW 76.1 billion of restructuring company provisioning including the POSCO Plantec and STS Semiconductor & Telecommunications, KRW28.5 billion of provisioning for rating adjustment of shipbuilding companies led to a 13.2% increase in provisioning YoY.

P.9 Business Results of Subsidiaries

Now let's go to page nine, the subsidiaries net income.

Hana Bank's 2015 1H net income, despite the interest income decline, posted an increase in fee income and disposition and valuation gains, posting KRW 560.6 billion, a 0.7% YoY increase.

In the case of KEB, KEB credit card division was spun-off in September of 2014. So in the case of the first half net income, the credit card fee income underlying effect occurring in the previous year existed, so KEB net income posted KRW 231.3 billion, a 27.6% drop YoY. In the Daetoo Securities, the first half net income posted KRW 79.5 billion, a 314.1% increase YoY with the increase of brokerage fee income following more sales of securities as well as increase of IB-related fee income and disposition and valuation gains.

KEB Hana Card was in the black in Q2 and posted KRW 11 billion of net income in the first half. Hana Capital, Hana Life Insurance and Hana Savings Bank’s 1H net income rose dramatically YoY, as you can see in the chart. Overall, the stagnant bank income was offset by the increase of non-bank subsidiaries income, leading to a portfolio positive effect of the holding company.

P.10 NIM

Next page 10, the group’s net interest margin or NIM.

The group's Q2 NIM made up of Hana Bank, KEB and KEB Hana Card posted 1.80%. Due to Hana Bank and KEB, NIM declined 2bp and 4bp QoQ respectively. And the group’s overall NIM dropped 3bp QoQ. We expect that seeing the recent trend, although NIM showed recovery in May and June after a low point in April, NIM improvement will not be easy for the time being, with an additional base interest rate cut in Q2. We will do our best so that NIM adjustment will be minimal through measures including continuous asset liability portfolio adjustments centering on the continued profitability.

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

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

2015 1H non-interest income rose 48.8% YoY, posting KRW 1.3 trillion. Out of this, the income recorded KRW 971.6 billion, a 12.6% YoY and an 8.1% QoQ increase. Credit card fee income out of fee income rose 2.2% QoQ with the increase in sales and asset management fee income according to trust and brokerage fee increase of securities-linked products, rose 27.7% YoY.

The first half SG&A grew 6.7% YoY and out of this salary and benefits and administrative expenses showed a comparatively higher increase. This was due to one-off item costs, including Hana Daetoo Securities profit linked performance pay and KEB Hana Card integrated costs. Taking this into consideration, growth in SG&A is being maintained at an appropriate level. Despite the SG&A increase, as you can see on the bottom right graph, the group 2015 1H cost income ratio with the improvement in general ordinary income posted 56.2%, a 6%p drop YTD.

P.13 Group Total Assets/ Total Liabilities & Equity

Now moving on to page 13, the group’s total assets, liabilities and equity.

As of quarter end of Q2 2015, the group's total assets stood at KRW 332.6 trillion, and it grows to KRW 408.4 trillion if we add the group's trust asset of KRW 75.8 trillion, of which Hana Bank's and KEB's total assets are KRW 201.3 trillion and KRW 145.6 trillion, respectively, inclusive of trust assets. Group's total liability is KRW 309.8 trillion and equity is KRW 22.7 trillion.

P.14 Hana Bank KRW Loan/ Deposit

Page 14, Hana Bank's loans and deposits in won.

In the first half of 2015, Hana Bank's loans in won recorded KRW 114.4 trillion, up 3.2% YTD and up 2.9% QoQ. The breakdown is as follows. Large corporate loans recorded KRW 13.5 trillion, down 12.7% YTD, whereas SME loans increased 6.3% during the same period to KRW 39 trillion. The continuous portfolio adjustment since 2014 led to a decrease in large corporate loans and an increase in SME loans, including SOHO loans.

Household loans grew to KRW 61.1 trillion, up 5.8% from 2014 year-end. This was due to an increase in mortgage loans by 10.5% YTD. It seems as if Hana Bank's household loans increased by a significant amount, but there's stringent risk management focusing on HF mortgage loan products that are to be transferred to HF Corporation. Deposits increased KRW 122.1 trillion, up 1% YTD. Of the deposits in won, core deposits increased 12.8%, whereas high cost time deposits decreased 4.4% during the same period, showing sound improvement in the funding structure.

P.15 Korea Exchange Bank KRW Loan/ Deposit

Page 15, KEB's loans and deposits in won.

In the first half of 2015, KEB's loans in won recorded KRW 53.9 trillion, up 2.7% YoY and down by 1.2% QoQ. By sector, large corporate loans recorded KRW 9.3 trillion, down 10.3% YTD, and SME loans increased by 7.9% during the same period to KRW 21.4 trillion. Household loans increased by 4.5% YTD to KRW 22.3 trillion on the back of an 8.5% increase in mortgage loans. Deposits remained the same as year-end of last year at KRW 69.4 trillion. Core deposits increased by 8.7% while time deposits decreased 6.9% YTD showing improved funding structure similar to Hana Bank.

P.17 Group Asset Quality

And now page 17, the group's asset quality.

The quarter-end group's total credit stood at KRW 233.9 trillion, of which substandard and below were KRW 3.3 trillion. Total credit increased by 1.3% YTD and NPL by 6.1%. This brings the Q2 group's NPL ratio to 1.41%, up 6bp YTD. On the top right hand corner shows the new formation of NPL amounting to KRW 423.4 billion, which includes the NPL that had increased before the group's sale, write-off and debt equity swap during Q2, of which KRW 343.1 billion belongs to Hana Bank and KEB combined and the remaining KRW 80.3 billion to the rest of the subsidiaries. Bank's asset quality will be explained in more detail in the next slide.

P.18 Hana Bank Asset Quality

Page 18, Hana Bank's asset quality.

Hana Bank's total credit increased by 2.7% during the first half of the year to KRW 130.3 trillion, and NPL by 5.5% to KRW 1.57 trillion. This raised the NPL ratio up 3bp to 1.21%, and the NPL coverage ratio dropped 1.2%p percentage points to 129.8%. Hana Bank's delinquency ratio as of the end of Q2 was stable at 0.43%.

P.19 Korea Exchange Bank Asset Quality

And now page 19, KEB's asset quality.

KEB's Q2 total credit decreased by 1.2% YTD to KRW 80.7 trillion and NPL increased by 10.7% to KRW1.2 trillion. NPL ratio increased by 17bp to 1.53%, and NPL coverage ratio fell 4.2%p to 101.2% during the same period. KEB delinquency ratio in Q2 was 0.69%, up 25bp YTD. This is reflective of the credit exposure to POSCO Plantec and other corporates undergoing restructuring. Related provisioning has already been made, and there will be limited influence coming from these companies on the bank's P&L.

P.20 Provision Analysis

And now page 20, the credit cost.

The group's Q2 credit cost was up 8bp QoQ to 0.53% on a cumulative basis. And Hana Bank and KEB's credit cost was 0.33% and 0.7%, respectively. Recently, there has been exceptional exposure on the part of Hana Bank and KEB to certain large corporates undergoing restructuring, which produced a one-off increase in the amount of loan loss provision. But on average, Hana Financial Group's credit cost has been maintained at the early part of 0.5% level since 2013.

P.21 Capital Adequacy

Last page, page 21, the capital adequacy.

The group's expected BIS ratio and Tier 1 ratio for the quarter are 12.48% and 9.94%, respectively. The group's common equity Tier 1 ratio increased 24bp YTD to 9.42%, but an 8bp fall is expected QoQ. In the second half of the year, continuous effort will be made to increase selective assets to make the portfolio more capital efficient. And earnings improvement and cost cutting initiatives shall enhance capital adequacy, in turn, consistently improving the CET1 ratio. Please refer to the appendix for more information on the subsidiaries.

This concludes the Hana Financial Group's earnings release for the first half 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 2015Q2 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.