FSC Press Release of September 15, 1998

FSC Press Release of September 15, 1998

Fiscal Support Plan for

Commercial Bank of Korea and Hanil Bank

The Government decided to inject a total of 4.53 trillion won by the end of September to the Commercial Bank of Korea and the Hanil Bank. With this fiscal support Commercial Bank of Korea/Hanil Bank will be provided with the opportunity to recapitalize and enhance asset quality and furthermore nurture as a leading bank. By doing so, it will also contribute greatly toward alleviating credit crunch and restoring the intermediary function of the financial sector.

I. Underlying Principle of Fiscal Support

◇ Inject fiscal money promptly upon devising rehabilitation plans so that financial restructuring is completed by the end of September

◇ Fiscal support will be based on the following principles on a timely basis

― Self-rescue efforts

o Fiscal support will be provided only on condition that feasible self-rescue efforts for enhancement of productivity and profitability, such as downsizing of personnel and branch network, disposal of fixed assets and foreign investment inducement are presented.

― Accountability

o Loss-sharing of existing shareholders through capital reduction and replacement of management that are responsible for poor management.

― Asset quality enhancement

o Draw up plans for reducing existing NPL burden and ways to prevent the buildup of newly occurring NPLs

o Drastic resolution of NPLs of substandard and below by KAMCO

o Normalization of precautionary loans through work-out

o Upgrade quality of other loans through debt-equity swap or mutual fund

― Promptness and Sufficiency

o Support is to be provided promptly and at a sufficient level so as to facilitate normal operations of financial institutions

― Increased loans to the corporate sector

o Increase the amount of loans provided to corporates especially to SMEs

II. Fiscal Support Criterion and Amount

Rationale for Fiscal Support

Rationale for Fiscal Support

Fiscal support is intended to

― confirm government's strong commitment to push forward with financial restructuring and thereby increase foreign confidence

― maximize synergy effect of bank mergers

― promote leading banks

― help to resolve credit crunch and hence bring about financial market stabilization

Conditions

Conditions

◇ Chairman of the Financial Supervisory Commission will issue a Terms of Reference (TOR) and in the event the conditions prescribed in the TOR are not fully satisfied all management will be dismissed.

· Replacement of management

· Downsizing : to a level that will bring "operational revenue per employee" up to that of advanced nations

· Branch closures : close down branches that are operating in the red or that display low productivity

· ROE : 15% or above by the end of 2000

· ROA : 1% or above by the end of 2000

· Ratio of substandard and below loans : 1.0% or below of total loans by the end of 2000

Calculation Criterion

Calculation Criterion

― Recapitalization

o A level that will bring BIS ratio up to 10% (taking account of additional loss provisioning required under strengthened asset classification standards^*,estimated loss arising from newly occurring NPLs^**and loss arising from sale of NPLs)

^* asset classification standard : revised BSA standard effective as of July 1, 1998

^**estimated newly occurring NPLs : 3.2 trillion won

― Purchase of NPLs

o All pre-existing NPLs purchasable by KAMCO

Amount of Fiscal Support

Amount of Fiscal Support

― Total fiscal support is 4.53 trillion won (refer to attachment 2)

o Recapitalization : 3.27 trillion won

* Capital injection from KDIC

* Government equity stake after capital reduction and recapitalization : 94.76%

o Purchase of NPLs : KAMCO purchasing amount of 1.26 trillion won

* Subject to change due to possible adjustments to purchasable NPLs

* purchase of 3.7 trillion won worth representing 80% of substandard and below loans of 4.6 trillion won of Commercial Bank of Korea/Hanil Bank based on revised BSA standards as of end-June, 1998 (the remainder will be disposed by the banks themselves)

III. Time Schedule

Sept. 13 (Sun) o Submission of MOU and preliminary implementation plan

Sept. 14 (Mon) o Financial Supervisory Commission (FSC) meeting

· Capital reduction order

o Bank Board of Director's meeting

·Resolution of capital reduction and recapitalization

Sept. 18 (Fri) o Bank's request for fiscal support

·Request made to KAMCO and KDIC via FSC

Sept. 25 (Fri) o Purchase (payment) of NPLs (KAMCO)

Sept. 30 (Wed) o Special Shareholder's meeting

·Merger approval

o Payment for stock purchase (KDIC)

attachment

Terms of Reference

― Replacement of management

Category

Content

Number of Executive Officers

·Average for 4 large commercial banks

Replacement of Executive Officers

·Executive officers qualified to play a leading role in bank consolidation
·Executive officers equipped with expertise and novelty

Appointment of Directors

·Utilization of objective appointment criterion

Non-Standing Directors

·Clear description of responsibilities

Category	Content
Number of Executive Officers	·Average for 4 large commercial banks
Replacement of Executive Officers	·Executive officers qualified to play a leading role in bank consolidation ·Executive officers equipped with expertise and novelty
Appointment of Directors	·Utilization of objective appointment criterion
Non-Standing Directors	·Clear description of responsibilities

― Downsizing of personnel and branch network

Category

Content

Personnel

·Downsize to a level that will bring operational revenue per employee up to that of advanced countries (approx. 260 million won) by 2000
·Layoff targets will mostly be higher ranking employees

Branch Closures

·Integration of overlapping branches
·Closure of branches operating in the red
·Closure of branches that show low productivity

Category	Content
Personnel	·Downsize to a level that will bring operational revenue per employee up to that of advanced countries (approx. 260 million won) by 2000 ·Layoff targets will mostly be higher ranking employees
Branch Closures	·Integration of overlapping branches ·Closure of branches operating in the red ·Closure of branches that show low productivity

― Profitability and Productivity

Category

Content

ROA

·1.0% or above by the end of 2000

ROE

·15.0% or above by the end of 2000

Earning/Cost ratio

·60% or below by the end of 2000

Cost Ratio^*

·40% or below by the end of 1999

Category	Content
ROA	·1.0% or above by the end of 2000
ROE	·15.0% or above by the end of 2000
Earning/Cost ratio	·60% or below by the end of 2000
Cost Ratio^*	·40% or below by the end of 1999

^*Cost Ratio = (operational expense + allowance for retirement payment + contribution toward welfare fund)/(revenue from interest related business + revenue from non-interest related business + revenue from trust business)* 100

― Financial Soundness

Category

Content

BIS Capital Adequacy Ratio

·Maintain 10% or above starting from end-June, 1999

Ratio of Substandard and Below Loans

·1.0% or below by the end of 2000

Risk Exposure^*

·100% or below by the end of 2000

Loan Workout Plan

·Identify workout targets and schedule

Category	Content
BIS Capital Adequacy Ratio	·Maintain 10% or above starting from end-June, 1999
Ratio of Substandard and Below Loans	·1.0% or below by the end of 2000
Risk Exposure^*	·100% or below by the end of 2000
Loan Workout Plan	·Identify workout targets and schedule

^*Risk Exposure = risky assets/equity capital

- Risky assets : NPLs (substandard and below) - loss provisioning - liquid asset collateral

- Liquid asset collateral : asset amount that is backed by cash or government guaranteed securities (based on market value) (eg; market value of government and public bonds that are used as collateral toward loans)

― Others

Category

Content

Capital Reduction

·In accordance to capital reduction or reverse stock split order of the FSC

Western-style Annual Salary/Contract based Compensation Scheme ¹

·Apply to higher ranking employees by the end of 1999
·Expand to all employees by the end of 2001

Disposition of Subsidiaries and Fixed Assets

·Disposal of troubled subsidiaries : by the end of 1998
·Disposal of fixed assets : by the end of 1999

Financial Structure Projections ²

·For years up to 2004

Increase of Corporate Loans

·Continue to extend corporate loans (including SME loans) at a level exceeding pre-government support level

Merger-related Plans ³

·Action plans necessary to complete merger

Risk Management Improvement Plans ³

·ALM
·Credit risk management
·Foreign exchange risk management

Category	Content
Capital Reduction	·In accordance to capital reduction or reverse stock split order of the FSC
Western-style Annual Salary/Contract based Compensation Scheme ¹	·Apply to higher ranking employees by the end of 1999 ·Expand to all employees by the end of 2001
Disposition of Subsidiaries and Fixed Assets	·Disposal of troubled subsidiaries : by the end of 1998 ·Disposal of fixed assets : by the end of 1999
Financial Structure Projections ²	·For years up to 2004
Increase of Corporate Loans	·Continue to extend corporate loans (including SME loans) at a level exceeding pre-government support level
Merger-related Plans ³	·Action plans necessary to complete merger
Risk Management Improvement Plans ³	·ALM ·Credit risk management ·Foreign exchange risk management

¹with input from accounting firm

²with input from accounting firm and to include projections under w/ and w/o government support scenarios

³make reference to best practice guidelines by the FSC in consultation with consulting firms

Calculation of Fiscal Support to

Commercial Bank of Korea and Hanil Bank

(in 100 million won)

Category

Amount

Remarks

A.

Risk Weighted Assets after sale of NPLs

484,881

B.

Equity capital necessary for reaching BIS ratio of 10%

48,488

A x 10%

C.

Tier II capital ¹⁾

24,244

recognize up
to 100% of
core capital

D.

Necessary core capital

24,244

B - C

E.

Core capital after consideration of NPLs

- 8,456

a-b-c+d

a. core capital as of end-June, 1998
b. additional loss provisioning ²⁾
- existing NPLs
- new occurring NPLs
c. loss arising from sale of NPLs ²⁾
- existing NPLs
- new occurring NPLs
d. operational revenue

17,965
(16,126)
4,058
12,068
(16,172)
11,477
4,695
5,877

2nd half, 1998

F.

Recapitalization

32,700

D - E

G.

Purchase of NPLs ³⁾

12,600

H.

Total Fiscal Support

45,300

F + G

	Category	Amount	Remarks
A.	Risk Weighted Assets after sale of NPLs	484,881
B.	Equity capital necessary for reaching BIS ratio of 10%	48,488	A x 10%
C.	Tier II capital ¹⁾	24,244	recognize up to 100% of core capital
D.	Necessary core capital	24,244	B - C
E.	Core capital after consideration of NPLs	- 8,456	a-b-c+d
a. core capital as of end-June, 1998 b. additional loss provisioning ²⁾ - existing NPLs - new occurring NPLs c. loss arising from sale of NPLs ²⁾ - existing NPLs - new occurring NPLs d. operational revenue	17,965 (16,126) 4,058 12,068 (16,172) 11,477 4,695 5,877	2nd half, 1998
F.	Recapitalization	32,700	D - E
G.	Purchase of NPLs ³⁾	12,600
H.	Total Fiscal Support	45,300	F + G

¹⁾only loss provisioning for normal and precautionary loans will be recognized as Tier II capital

²⁾o existing NPLs : NPLs based on revised BSA standards effective as of July 1, 1998 (4.6 trillion won)

o estimated new occurring NPLs : (approximately 3.2 trillion won)

³⁾KAMCO payment toward 3.7 trillion worth of NPLs (out of total existing NPLs of 4.6 trillion won)

→ buying rate for substandard loans ; 45%, doubtful and estimated loss loans ; 3%

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Structural Reform Planning Unit

Financial Supervisory Commission

Seoul, Korea