Graduate School of Business Administration

UVA-F-1386

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.

See Thompson Bankwatch Inc., Korea First Bank Report, February 11, 1997 and September 27, 1991.
_____________________________________________________________________________________________
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 dardencases@virginia.edu. 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.

-2-

UVA-F- 1386

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.

-3-

UVA-F- 1386

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, whic h
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.
4
See 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.

-4-

UVA-F- 1386

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 normalizedmarket 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.
See Financial Times, January 28, 1997.
9
See Financial Times, January 28, 1997.
8

-5-

UVA-F- 1386

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?

-6-

UVA-F- 1386

Exhibit I
Korea First Bank
Consolidated Balance Sheet
(all figures in millions of Korean Won except for exchange rate data)

Exchange Rate

1998

1997

1996

1204

1600

841

(Korean won to US Dollar as of year end)

ASSETS
cash and due from banks
loans

2,614,021
15,025,982

3,176,037
20,360,639

3,708,713
20,208,399

call loans
securities

577,694
8,309,811

218,819
9,022,784

321,010
11,781,655

foreign exchange
customers liabilities on guarantees

1,422,998
1,466,348

2,481,595
3,510,978

2,674,736
4,475,788

premises and equipment

other assets

1,830,423
2,250,808

1,093,474
1,876,511

876,068
1,968,187

consolidation adjustment debit

33,498,085

50,362
41,791,199

100,724
46,115,280

deposits
call money

22,478,076
179,718

27,581,402
1,031,542

26,910,616
2,162,595

borrowings
guarantees outstanding
provisions

4,211,966
1,466,348
2,430,539

5,908,450
3,510,978
1,206,061

7,291,511
4,475,788

other liabilities

2,570,805
33,337,452

2,367,466
41,605,899

3,361,945
44,202,455

109,389

115,277

144,367

1,600,000
16,610

820,000
213,820

820,000
502,361

(1,914,597)
349,231

(963,881)
(408)

446,446
(1,180)

LIABILITIES

MINORITY INTERESTS
SHAREHOLDERS EQUITY
common stock
capital surplus
retained earnings
capital adjustment
consolidation adjustment credit

Total Liabilities, Minority Interest

and Shareholders Equity

51,244

492
70,023

831
1,768,458

33,498,085

41,791,199

46,115,280

Source: Korea First Bank Annual Reports; 1997, 1998.

-7-

UVA-F- 1386

Exhibit 2
Korea First Bank
Statement Of Operations
(all figures in million of Korean Won except for exhchange rate figures)

Exchange Rate

1998

1997

1996

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

interest and dividends on investment securities
fees and commissions

356,054
420,353
299,710

857,854
263,505
318,821

1,207,088
294,614

other operating income

non-operating income

737,430
122,577

612,296
157,077

178,448
98,297

4,295,388

4,611,442

3,961,872

Interest expense
fees and commissions

3,158,489
24,138

3,024,548
26,567

2,718,878
23,568

general and administrative

other operating expenses

390,406
2,932,734

477,510
1,745,687

451,442
726,742

non-operating expenses

478,425
6,984,192

980,884
6,255,196

20,740
3,941,370

(2,688,804)

(1,643,754)

Expenses

Gain(Loss) before income tax expense

Income tax expense
Loss before minority interest
Net loss attributable to minority interest
amortization of consolidation adjustment, net
equity in net loss of affiliates, net
Consolidated Net gain(loss)

Source: Korea First Bank Annual Reports; 1997, 1998.

320
(2,689,124)
14,655
50,178
6,382
(2,731,029)

5,402
(1,649,156)
14,243
50,130
117
(1,685,160)

20,502
10,451
10,051
(4,898)
50,064
(5,400)
(39,511)

-8-

UVA-F- 1386

Exhibit 3
Nationwide Commercial Banks Ranked by Size

1
2

Korea Exchange Bank

Cho Hung Bank

3
4

Hanil Bank
Kookmin Bank

5
6

Korea First Bank

Commercial Bank of Korea

7
8
9

Shinhan Bank
Seoulbank
Housing and Commercial Bank

10
11

Boram Bank
Donghwa Bank

12
13

Hana Bank
KorAm Bank

14
15

DongNam Bank
Daedong Bank

16

Peace Bank

Source: Thompson Bankwatch Inc., Banking System Report: South Korea, April 28, 1998.

-9-

UVA-F- 1386

Exhibit 4
Korea First Bank
Loan Data
(all figures in billion of Korean Won)

1998

1997

total
Exchange Rate

1204

1996

total
1600

%
total

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
Local L/C Bills Bought

1,374.0
58.6

10.7%
0.5%

1,948.3
29.4

11.7%
0.2%

1,626.8
112.1

9.9%
0.7%

Advances to Customers
Total
Foreign Currency Denominated

506.1
8,396.3

3.9%

146.2
9,603.6

0.9%

252.9
10,778.8

1.5%

Onshore

3,554.6

27.7%

6,397.6

38.5%

5,159.0

31.3%

Offshore
Domestic Import Usance Bills

596.8
0.1

4.7%
0.0%

441.1
5.8

2.7%
0.0%

278.9
1.4

1.7%
0.0%

Advances to Customers
Total
TOTAL LOAN PORTFOLIO

267.8
4,419.3
12,815.6

2.1%

151.1
6,995.6
16,599.2

0.9%

252.9
5,692.2
16,471.0

1.5%

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
Textile & Garments

407.7 6.3%
571.4 8.8%

432.5
544.6

5.8%
7.3%

486.9
668.3

5.5%
7.6%

Construction
Wholesale & Retail

586.4 9.1%
616.3 9.5%

651.5
941.7

8.7%
12.6%

1278
1057.1

14.5%
12.0%

4042.3 62.6%
6457.6

4620.5
7479.7

61.8%

4893.9
8787

55.7%

Others
TOTAL

Source: Korea First Bank Annual Reports; 1997, 1998.

-10-

UVA-F-1386

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

-11-

UVA-F-1386

Exhibit 6
Korea First Bank
Non-Performing Loan Data
(In Billions of Korean Won)

Loan Classification

1998

1997

1996

Exchange Rate

1204

1600

841

(Korean won to US Dollar as of year end)

Normal

11,663.9

21,221.4

23,268.4

Precautionary
Substandard
Doubtful

3,295.3
2,188.5
1,522.3

2,563.0
1,566.5
1,433.9

2,792.2
1,525.8
261.7

Estimated Loss
TOTAL CREDITS**

121.5
18,791.5

55.5
26,840.3

82.2
27,930.3

Bad Loans***
% of credits

1,643.8
8.7%

1,489.4
5.5%

343.9
1.2%

% of credits
Systemwide NPL as % of credits

3,832.3
20.4%
7.4%

3,055.9
11.4%

1,869.7
6.7%

Non-Performing Loans***

(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
NORMAL
Credits 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 where
loss is expected but still undetermined (previously six months)
ESTIMATED LOSS
Unsecured portion of credits deemed impossible to recover and where loss is
expected but still undetermined

Source: Korea First Bank Annual Reports; 1997, 1998,

-12-

UVA-F- 1386

Exhibit 7
Korea First Bank
Loan Loss Reserves
(In Billions of Won)
1998

1997

1204

1600

(Korean won to US Dollar as of year end)

Reserve at January 1st
642.7

419.5

Provision for Loan Losses

Write-Offs
Adjustments

796.8
226.8
298.4

451.4
259
30.8

Reserve at December 31st

1511.1

642.7

Exchange Rate

FSC guidelines stipulate that Korean commercial banks set aside a reserve
for 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.

-13-

UVA-F-1386

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

Hanvit Bank
1997

1998

Korea First Bank

1997

1998

Summit Bancorp
1997

Total Interest Earning Assets

20279

32726.3

60938.4

59442.4

25109.0

26629.5

36439.3

45212

By 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%

Won 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/a

Average 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

35073.8
81.4%

By Currency

By Type
Deposits

61.7%

53.1%

69.9%

64.0%

73.1%

60.0%

75.1%

Borrowings

31.0%

40.8%

22.9%

26.0%

22.4%

33.2%

24.9%

Liquid Liabilities/Other

7.3%

6.1%

7.2%

10.0%

4.5%

6.8%

Won currency

86.1%

62.4%

57.8%

50.6%

63.5%

59.5%

n/a

Foreign currency

13.9%

37.6%

42.2%

49.4%

36.5%

40.5%

n/a

n/a

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

3786.5

Expense

2766.9

7677

13039.5

8028.2

6984.2

6255.2

2479.8

3193.0

144.3

-1971

-3360.4

-444.8

-2688.8

-1643.8

560.8

593.5

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%
0.9%

18.6%
-

By Currency

Average Interest Rate For Liabilities

Net Income

n/a

BIS Capital Ratio

NPL/total credits outstanding

Loan Loss Provision/Total Credits
Securities Investments
corporate securities./ total sec.

n/a

5.5%

5.4%

4.2%

20.4%

11.4%

0.7%

2.9%

2.5%

2.8%

1.3%

8.0%

2.4%

1.6%

1.6%

6966.5

6274

16633.4

12308

5662.5

4454.6

12000.0

14715.4

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.

-14-

UVA-F-1386

EXHIBIT 9
Korea First Bank
Investment Holdings
(in billions of Korean Won)
Exchange Rate

1998

1997

1996

1204

1600

841

(Korean won to US Dollar as of year end)

Won Currency
Government Bonds
Local Government Bonds

660.8
23.6

504.8
15.1

398.4
-

Financial Business Bonds

Government Guaranteed Debentures

542.9
1,395.9

233.9
1,213.7

1,119.5
-

Debentures
Equity Investments

696.8
1,366.2

651.9
868.9

657.7
1,268.4

Other

293.3
4979.5

68.1
3556.4

116.9
3560.9

Onshore
Offshore

644.4
38.6

811
87.2

802.9

Total Foreign Investments

683

898.2

802.9

5662.5

4454.6

99.2
4264.6

36.4%

34.1%

45.2%

Total Won Investments

Foreign Currency

Valuation Allowance
TOTAL INVESTMENT HOLDINGS
% corporate exposure
(equity + debentures)

Source: Korea First Bank Annual Reports; 1997, 1998.

-15-

UVA-F- 1386

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

Total

BANKING ACCOUNTS
Won Currency
rate sensitive assets
rate sensitive liabilities
Gap

7,739.5
9,399.4
(1,659.9)

1,375.3
3,346.9
(1,971.6)

4,905.6
2,125.3
2,780.3

14,020.4
14,871.6
(851.2)

assets/liabilities

82.3%

41.1%

230.8%

94.3%

rate sensitive assets

rate sensitive liabilities
gap

5,201.0
5,488.0
(287.0)

1,281.0
1,332.0
(51.0)

46.0
48.0
(2.0)

6,528.0
6,868.0
(340.0)

assets/liabilities

94.8%

96.2%

95.8%

95.0%

Foreign Currencies

TRUST ACCOUNTS**
rate sensitive assets

2,917.0

824.4

rate sensitive liabilities

gap

502.8
2,414.2

1,048.3
(223.9)

2,088.0
(1,358.6)

3,639.1
831.7

78.6%

34.9%

122.9%

assets/liabilities
580.2%
** Trust accounts with guaranteed principal and/or interest

Source: Korea First Bank Annual Reports; 1997, 1998.

729.4

4,470.8

-16-

UVA-F- 1386

EXHIBIT 11
Korea First Bank
Average Interest Generating Assets & Liabilities
(In Billion of Korean Won)

1998
Exchange Rate

Avg.
Rate

1204

1997

Avg.
Rate

1600

Avg.
1996

Rate

841

(Korean won to US Dollar as of year end)

ASSETS
Won Currency
Loans
Securites

9,120.3
4,526.9

Other Assets

2,075.3

Loans
Securites

5,529.3
721.5

Other Assets

3,135.7
25,109.0

13.4%
8.7%
13.3%

11,908.3
3,293.4
676.6

10.0%
7.9%
12.2%

10,322.9
3,385.8
548.5

10.1%
8.1%
10.8%

Foreign Currencies

TOTAL ASSETS

6.7%
4.5%
11.7%

6,773.1
1,001.7

10.6%

2,976.4
26,629.5

6.6%
5.2%
7.4%

5,526.0
728.3

6.4%
6.1%
4.6%

8.4%

717.4
21,228.9

11,466.9
2,298.7

6.7%
7.4%

8.5%

LIABILITIES
Won Currency
Deposits
Debts

11,326.1
3,655.2

9.9%
9.9%

11,855.1
2,895.7

7.1%
9.0%

Other Liabilities

1,103.7

30.7%

648.1

19.8%

Deposits
Debts

7,200.0
2,016.7

9.4%
6.6%

3,668.3
5,710.7

6.2%
6.3%

2,626.8
5,201.7

5.2%
5.8%

Other Liabilities

45.1
25,346.8

10.7%
10.4%

1,115.7
25,893.6

5.0%
7.2%

21,594.1

6.3%

Foreign Currency

TOTAL LIABILITIES

Source: Korea First Bank Annual Reports; 1997, 1998

-17-

UVA-F- 1386

EXHIBIT 12
Korea First Bank
Net Interest Income
(In billion of Korean Won)
Exchange Rate

1998

1997

1996

1204

1600

841

(Korean won to US Dollar as of year end)

Interest Income
Won Currency Loans
Foreign Currency Loans

1,223.3
370.2

1,186.1
447.6

1,034.8
350.9

Won Currency Securities

Foreign Currency Securites

395.7
32.2

261.1
52.1

273.8
44.4

Call Loans
Due from banks

122.4
183.3

30.9
88.5

11.6
92.4

Other Interest Income

Total Interest Income

337.4
2,664.5

182.9
2,249.2

180.0
1,987.9

Interest Expense
Won Currency Deposits

1,125.1

842.6

762.8

Foreign Currency Deposits

Won Currency Debts

679.7
360.2

228.4
259.5

135.5
170.9

Foreign Currency Debts

Call Money

133.1
152.5

362.1
127.5

302.1
76.4

Other Interest Expenses

Total Interest Expense

190.9
2,641.5

56.8
1,876.9

40.0
1,487.7

NET INTEREST INCOME

23.0

372.3

500.2

Source: Korea First Bank Annual Reports; 1997, 1998.

-18-

UVA-F- 1386

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.

rate sensitive assets

rate sensitive liabilities
accumulated gap
accumulated assets/liabilities
Foreign Currencies
rate sensitive assets
rate sensitive liabilities
accumulated gap
accumulated assets/liabilities
TRUST ACCOUNTS**
rate sensitive assets
rate sensitive liabilities
accumulated gap

6mos. - 1year

Over 1yr

Total

5,938

7,945

21,382

4,748

6,636
1,190

9,454
2,007

21,382
13,437

21,382

5,287
(539)
89.8%

1,349
(698)
89.5%

2,818
(1,509)
84.0%

11,928
100.0%

21,382
-

3,538
5,452

4,589
6,429

5,269
6,543

7,368
7,368

3,538
5,452

1,051
977

680
114

2,099
825

7,368
7,368

(1,914)
64.9%

(1,840)
71.4%

(1,274)
80.5%

100.0%

4,065
1,774

5,026
2,746

6,488
4,175

8,828
8,828

4,065
1,774

961
971

1,463
1,429

2,340
4,654

8,828
8,828

2,280
98.9%

2,314
102.3%

50.3%

BANKING ACCOUNTS
Won Currency

2,291
accumulated assets/liabilities
229.1%
** Trust accounts with guaranteed principal and/or interest

Source: Korea First Bank Annual Reports; 1997, 1998.

-19-

UVA-F- 1386

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

Ja
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-20UVA-F- 1386

FIGURE 1

Korea First Stock Price (in Korean Won)

80000

70000
60000
50000
40000

30000
20000
10000
0

Korean Total Market Index (KOSPI)

1200

1000

800

600

400

200

-21-

UVA-F-1386

FIGURE 2

Normalized Market Value Comparison

Finance Index

Korea First

Total Market Index

120
100
80
60
40
20

No
v-9
8

Ju
l-9
8
Se
p98

M
ay
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8

Ja
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M
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Ja
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-22-

UVA-F- 1386

FIGURE 3

Relative Performance of Korean Industry Specific

Stock Indices
Construction

Chemicals

Textile/Apparel

Transports

Dec-98

Oct-98

Aug-98

Jun-98

Apr-98

Feb-98

Dec-97

Oct-97

Aug-97

Jun-97

Apr-97

Feb-97

Dec-96

Oct-96

Aug-96

Jun-96

Apr-96

Feb-96

Dec-95

120
100
80
60
40
20
0

-23-

UVA-F- 1386

FIGURE 4

Normalized Country Prime Rate Comparison

140

United States

120
100
Honk Kong

80
60
40

Australia

20

Ap
r-9
6
Ju
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6
Oc
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6
Ja
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Ap
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7
Ju
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7
Oc
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Ja
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Ap
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Ju
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Oc
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Ja
n96

0
Korea

-24-

UVA-F- 1386

FIGURE 5

Normalized Asia Pacific Currencies (vs. US Dollar)

250

Japanese
Yen
Korean Won

200

150

100

Hong Kong
Dollar
Taiwan
Dollar
Thai Baht

50

Ja
n-9
6
M
ar96
M
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6
Ju
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Se
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No
v-9
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M
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Ju
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Se
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No
v-9
8

Malaysian
Riggit
Singapore
Dollar