Still facing deep risk
Massive liquidity expansion, KRW appreciation and band-aid corporate reform efforts since
late November 2008 are not enough to drive a sustainable upturn in Korean bank share
prices, in our view, unless either much more drastic corporate reforms are actually executed,
as witnessed in 3Q98, or the macroeconomic cycle improves. We believe Korean banks are
still at risk of a deep downcycle in 2009, based on our analysis of the previous boom-andbust
cycles between the economic leading indicator (ELI) and loan growth.
Downside catalysts still not fully factored in
Key potential downside catalysts are: 1) worsening corporate earnings fundamentals and
financial health; 2) asset quality deterioration; 3) downward revisions to consensus EPS
estimates; and 4) deepening global recession. The KRW is still at risk of significantly
depreciating in 2009. We do not believe these concerns are fully factored in by the market.
Sentiment could bottom in 3Q09
We assume the price momentum of Korean banks shares will increase in 3Q09, more than
six months ahead of the sequential improvement signals in earnings and asset quality
indicators that we expect from 1Q10. We expect sector EPS to drop 36% in FY09, assuming
the sector average credit cost rises by 49bp to 114bp.
Underweight, with only one Buy, Shinhan FG
We initiate coverage of Korean banks with an Underweight rating, relative to the Kospi. We
have a Buy rating on Shinhan FG; a Hold on KBFG, Hana FG, IBK, KEB, Busan and Daegu;
and a Sell on Woori FH. Potential long-term upside catalysts are: 1) improved visibility in
earnings and asset quality, resulting from potential drastic corporate reforms; 2) an upturn in
the macroeconomic cycle; 3) continuation of the current account surplus amid falling capital
outflow (likely from 3Q09F); and 4) industry consolidation.

Contents
Executive summary 3
Either much more drastic corporate reforms or an improved macroeconomic cycle
are needed for a sustainable upturn in Korean bank shares, in our view. We expect
sentiment to bottom in late 2Q-3Q09. We are Underweight banks, with a Buy rating
on Shinhan FG.
3
2009 investment strategy 4
Korean bank share prices are at risk of falling to their previous lows in 1H09, given
the uncertainties in the global economy, asset quality and earnings momentum are
not yet fully factored in by the market. Underweight banks, with a Buy rating on
Shinhan FG.
4
Drastic corporate reforms ahead 18
Credit cost is at risk or surging sharply in 2009. Drastic corporate reforms are
needed, in our view. We believe potential reform cost is not yet fully discounted. Net
interest margin is also at risk of narrowing sharply. We anticipate lower entry points
in 2Q-3Q09.
18
Sensitivity test on credit risk 28
A sensitivity test shows a 10bp hike in credit cost could lead to 13.6% and 0.9%
drops in our FY09F EPS and NAV estimates, respectively. We estimate the
average breakeven credit cost at 193bp for the eight banks we cover. Woori FH and
IBK are the most vulnerable.
28
Long-term consolidation outlook 41
We believe the Korean bank sector consolidation will continue, although we assume
no major M&A activity in 2009. SFG is in the lead, with expanded market share and
best diversified earnings mix. We believe KEB is the best long-term M&A candidate.
41
Earnings forecasts 46
We expect the combined NP for the eight banks we cover to drop 35% in 2009 due
to a jump in credit cost, to 114bp in 2009 from 65bp 2008. Key swing factors behind
our FY09-10F are NIM and credit cost, to which we believe WFH and HFG are the
most vulnerable.
46
Company profiles 56
KB Financial Group 57
Shinhan Financial Group 65
Woori Financial Holdings 73
Hana Financial Group 81
Industrial Bank of Korea 89
Korea Exchange Bank 97
Busan Bank 105
Daegu Bank 113