UVA-F-1386

_____________________________________________________________________________________________ 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.

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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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

UVA-F- 1386

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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

UVA-F-1386

_

-21-

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

UVA-F- 1386

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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

UVA-F- 1386

-23-

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

UVA-F- 1386

-24-

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