2
Table of Contents
Feature 01 How Do Korea's HNWIs Manage Their Wealth?Warren Park, Juneun Kang
Issues 11 How Much a Threat Is Korea's Household Debt?Wanjoong Kim, Warren Park
17 Korea's Real Estate Project Finance Market: Diagnosis and RemediesJeungrak Sohn
23 Big Changes Afoot for Korea's Financial IndustryJaeman Song, Warren Park
30 Korea's Long-Term Solar Prospects Shine BrightHyeyoung Ahn
MarketWatcher
35 Interest Rates: Rates to be kept on hold for an extended periodWanjoong Kim
37 Exchange Rate: As uncertainties dissipate, a gradual strengthening of the KRW is expectedYootag Jung
39 Equities: A weak start in 2Q should pave the way to a stronger finishYonghyun Cho, Hana Daetoo Securities
1
Feature
How Do Korea's HNWIs Manage Their Wealth?
As Korea's financial services firms have come to realize, providing wealth management (WM)
services to high net worth individuals (HNWIs) can be a good way of generating a steady
stream of high-margin income. And given that Korea's HNWI population and wealth levels
continue to grow at a steady pace, it is no surprise that interest in the market has been on
the rise. As competition heats up in the market, banks and other financial institutions will need
to provide WM services tailored to the unique needs of their clients. Customer surveys such as
the one conducted recently by Hana Bank and the Hana Institute of Finance can help such
firms in acquiring a better understanding of HNWIs' attitudes toward their wealth and investing.
Warren Park, Senior Researcher Juneun Kang, Associate Researcher
[Figure 1] Whom Survey Respondents Consider "Wealthy" by Level of Wealth
48%
65%
27%
12%
11%
14%
21%
12%
34%
16%12%
21%
4%2%
All Respondents Total Assets
\5bn or Above
Total Assets
Below \5bn
Below \3bn
\3-5bn
\5-7bn
\7-10bn
\10bn or Above
Source: Hana PB Survey 2011
Hana Bank's recent survey provides insights into the attitudes of Korea's
wealthy toward investing
In late 2011, Hana Bank and the Hana
Institute of Finance conducted a month-long
survey of Hana Bank's private-banking cli-
ents to determine their attitudes toward their
wealth as well as how they manage it. The
survey was part of a general trend of
Korean financial institutions trying to gain
deeper insight into Korea's HNWIs and using
it to provide improved service to their
wealth management clients. This article pro-
vides a summary of the survey's key find-
ings along with some implications.
2
Mar 2012 Hana Insight
[Figure 2] Total Assets of Survey Respondents by Level of Financial Assets
39.9
67.6
114.3
139.4
155.0
288.9
744.4
\2bn or below
\2-4bn
\4-6bn
\6-8bn
\8-10bn
\10-20bn
\20bn or above
Average: \93.6 billion
(38%)
(37%)
(13%)
(4%)
(1%)
(5%)(2%)
(Percent of respondents in parentheses)
(Unit: \bn)
Source: Hana PB Survey 2011
The Hana PB Survey targeted customers
in the Private Banking (PB) unit of Hana
Bank who have financial assets of ₩1.0 bil-
lion or more, and questioned them on a
range of topics, including their attitudes to-
ward investing, wealth management, retire-
ment, gifts and inheritances, spending and
lifestyle. Three hundred seventy-nine people
participated in the survey. Their responses
were broken down and analyzed in terms of
factors such as level of wealth, age, and
area of residence, and the results were pub-
lished in February in a report titled "Wealth
Management of Korea's Wealthy Class."
Despite the limited size of the sample, most
of the results appear to be roughly in line
with other surveys. Thus, they can provide
helpful insights into the general attitudes of
Korea's HNWIs toward their wealth and
investing.
Whom do Hana Bank's PB clients
consider to be wealthy?
How one defines "wealthy" varies from
person to person and tends to depend on
one's own level of wealth. In the United
States, the Federal Reserve defines a HNWI
as someone with an annual income of
$100,000 plus a net worth in the top 10%
of US households. The more general defi-
nition, however, includes anyone with finan-
cial assets of $1 million or more. In the
case of the Hana PB Survey, 48% of re-
spondents said that one should have over
₩10 billion in total assets to be considered
wealthy, whereas 21% said ₩5-7 billion, and
16% said ₩3-5 billion. In other words,
around 80% of respondents believe that one
should have total assets of ₩5 billion or
more to be considered part of Korea's weal-
thy class.
3
Feature
[Figure 3] Annual Incomes of Respondents [Figure 4] Sources of Income of Respondents
15%
47%
23%
7% 7%
Below\0.1bn
\0.1-0.3bn
\0.3-0.5bn
\0.5-1bn \1bn orAbove
RentalIncom e
29%
Em ploymentIncome
14%
BusinessIncome
38%FinancialIncome
19%
Source: Hana PB Survey 2011 Source: Hana PB Survey 2011
What kinds of people responded to
the Hana PB Survey?
When asked about their annual income,
14% said they earn ₩500 million or more,
47% said ₩100-300 million, 23% said
₩300-500 million, and 15% said less than
₩100 million. With respect to sources of in-
come, 38% said their main source of income
was their own business, 29% said rental in-
come, 19% said financial investments, and
14% said employment income. The results
also showed that many HNWIs are business
owners and very active in purchasing and
leasing out retail space or other forms of re-
al estate.
In terms of area of residence, 42% of re-
spondents said they live in one of the main
three districts of Kangnam (Kangnam-gu,
Seocho-gu and Songpa-gu). The results also
showed that the number of emerging-HNWIs
living in one of these three districts or
Yongsan-gu - the centrally located area
along northern bank of the Han River - has
been rising over the past decade, whereas
the number living in the traditionally wealthy
areas of Seongbuk-dong, Hannam-dong and
Pyongchang-dong has been in relative de-
cline; this is particularly true for those with
total assets of ₩5 billion or more, 48% of
whom reside in one of the main Kangnam
districts. Moreover, of those respondents liv-
ing in one the main three Kangnam districts,
the majority were over 60 years old, sug-
gesting a general aging trend in Korea's
wealthy class.
In terms of educational achievement, 94%
of respondents have a bachelor's degree,
whereas 24% have a master's or Ph.D. Their
most common occupations are company CEO
(14.8%), self-employed businessperson
(13.5%), and professional (12.1%), followed
4
Mar 2012 Hana Insight
[Figure 5] Korea's HNWI Population [Figure 6] Financial Assets of Korean HNWIs
14.8
7.08.2
9.88 .6
11.6
13.5
15.9
2005 2006 2007 2008 2009 2010 2011 2012(E)
(Unit: 10,000 persons)
445415
369
314328292
269
429
2005 2006 2007 2008 2009 2010 2011 2012(E)
(Unit: \tn)
Source: BOK, Statistics Korea Source: BOK, Statistics Korea
by retired persons, company executives, com-
pany employees and those who live off their
real estate assets. Housewives accounted for
the highest percentage (31.3%) of re-
spondents; this is most likely because house-
wives tend to be responsible for handling
household finances and are therefore most
likely to respond to this type of survey.
One notable survey finding was that re-
spondents' ratio of assets to annual income
was very different from those of the average
Korean household. The average total assets
of respondents was ₩9.4 billion, whereas
their average income was in the ₩100-300
million range. This is in stark contrast with
the average Korean household, whose ratio
of total assets to annual income (₩40.12
million) is only around 7.4. This sort of gap
is evident in Japan as well, where the same
ratio for HNWIs is over 50. In both coun-
tries, the gap can most likely be attributed
to the tendency for the wealthy to inherit a
large portion of their wealth.
How large is Korea's HNWI pop-
ulation?
According to a variety of sources, Korea's
HNWI population, defined as those with fi-
nancial assets of ₩1 billion or more, was
148,000 in 2011, and is expected to grow to
159,000 in 2012. It is estimated that they
held ₩429 trillion (around 19% of total
household financial assets in Korea) in 2011,
and it is expected that this will grow by
3.6% to ₩445 trillion in 2012, equivalent to
₩2.8 billion per person.
Of the HNWI population's ₩429 trillion
in financial assets, about ₩237 trillion (55%)
is held mainly in bank deposits and ₩139
trillion (32%) in securities, mostly equities.
And given that the economic slowdown of
2011 is expected to continue into 2012, it is
5
Feature
[Figure 7] Types of Financial Firms Utilized by
Respondents for WM Services
[Figure 8] Share of Wealth Management Market
by Type of Financial Firm
1%
2%
2%
11%
14%
28%
43%
Insurance
Broker+Insurance
Broker
Bank+Insurance
Bank+Broker
Bank/s
Bank+Broker+Insurance Insurance9%
Broker17%
Investm entAdvisor 3%
Bank 72%
Source: Hana PB Survey 2011 Source: Hana PB Survey 2011
likely that their preference for safe assets
will increase, which should lead to further
inflows into banks.
In general, the wealth of HNWIs is man-
aged by a variety of financial institutions, in-
cluding banks, securities firms and insurance
companies. Of those surveyed, 43% said they
receive PB or WM services from all three
types of financial services companies. 28%
said they only receive such services from a
bank, 14% said a bank and a securities firm,
and 11% said a bank and an insurance
company. In other words, most HNWIs pre-
fer to manage their money through banks,
presumably because of the relative safety
that they provide.
Respondents were also asked how many
of each type of financial firm they patronize.
In the case of banks, 27% said they patron-
ize one bank, 39% said two banks, and 24%
said three, showing a general tendency to di-
versify banking relationships. Of those who
are clients of securities firms, 78% said they
patronize only one firm, whereas 19% said
they patronize two. In the case of insurance
firms, 41% said they patronize only one,
whereas 31% said two. Thus, it can be seen
that HNWIs are more likely to diversify
their relationships with banks than with se-
curities or insurance firms.
In terms of assets, respondents said they
put 71% of their assets in banks, versus
17% in securities firms, 9% in insurance
companies, and 3% in investment advisors.
The fact that the survey's respondents keep
most of their financial assets in banks is fur-
ther evidence that Korea's wealthy are inter-
ested in relatively safe investments.
6
Mar 2012 Hana Insight
[Figure 9] Allocation of Assets Held by
Respondents by Wealth Level
[Figure 10] Where Respondents Intend to
Increase Their Allocations This Year
48% 54%41%
8%8%
9%
16%14%
18%
28% 24%33%
AllRespondents
Total Assets\5bn or
Above
Total AssetsBelow \5bn
Deposits
Inv. Funds
Equities
RealEstate
21%
14%
18%
47%
10%
19%
23%
48%
15%
17%
21%
47%
Inv. Funds
Equities
Real Estate
Deposits
All Respondents
Total Assets \5bnor AboveTotal Assets Below\5bn
Source: Hana PB Survey 2011 Source: Hana PB Survey 2011
What types of assets do HNWIs like?
Survey respondents said they have 48%
of their assets in real estate and 52% in fi-
nancial assets, including 28% in deposits,
16% in investment funds, and 8% in
equities. In other words, they tend to favor
real estate the most, followed by deposits. In
addition, the results showed that the higher a
respondent's total assets, the more she is
likely to invest in real estate. Those with to-
tal assets above ₩5 billion had 46% in fi-
nancial assets, whereas those with assets be-
low ₩5 billion had 59% in financial assets.
For those who invest in equities, there was a
tendency to prefer indirect investing to direct
investing. Overall, it appears that the crisis
in Europe and other global uncertainties have
made HNWIs more risk-averse and thus
more likely to veer towards safer
investments.
Indeed, when asked about which asset
class they would like to invest in over the
next year, 47% said they expect to increase
their allocation to bank deposits, 32% said
equities (either directly or through investment
funds), and 21% said real estate. Those with
total assets of ₩5 billion or more were
more likely than those with less than ₩5
billion to say they intend to increase their
real estate holdings; this seemingly confirms
the general perception that the wealthiest in-
dividuals are more likely to invest in real
estate than those who are more modestly
wealthy.
As for how respondents attained their
wealth, 46% said it was through ownership
of a business, 21% said it was from real es-
tate investments, 21% said gifts/inheritance,
and 9% said employment income. Of course,
it should be noted that some of those who
said they received their wealth from a busi-
7
Feature
[Figure 11] Investment Preferences of
Respondents by Wealth Level and Asset Type
[Figure 12] Portfolio Return Expectations of
Respondents for the Coming Year
14% 15% 13%
22% 20% 23%
15% 16% 13%
26% 26% 25%
9% 9% 8%
9% 8% 10%4% 3% 6%
All Total Assets\5bn or
Above
Total AssetsBe low \5bn
Derivatives
Annuity
Insurance
Deposits
Fixed-Incom eOverseasFundsDom esticFundsOverseasEquitiesDom esticEquities
14%
54%
23%
6%
3%
0-5%
5-10%
10-15%
15-20%
20% orAbove
Note: Reflects top 3 allocations of each respondent
Source: Hana PB Survey 2011 Source: Hana PB Survey 2011
ness received it as a gift or inheritance. In
fact, about 21% of respondents said they re-
ceived an ownership stake in a business as a
gift or inheritance, but then grew their assets
through management of the business. It
should also be noted that those with total as-
sets above ₩5 billion were more likely to
have built their wealth through real estate in-
vestments or gifts/inheritance than those with
less than ₩5 billion.
What are the investment preferen-ces of HNWIs?
Upon examination of respondents' portfo-
lio allocations, it is evident that Korean
HNWIs have become more risk averse since
2008. Between 2008 and 2011, for instance,
there was a clear decline in the proportion
of real estate assets and investment funds - most likely the result of falling asset prices.
In contrast, there was an increase in the pro-
portion of deposits. Whether or not this
change in allocations is simply the result of
changes in asset prices is unclear, but even
if that is the case, respondents have not ac-
tively readjusted their portfolios to pre-crisis
allocations.
Upon closer look at specific asset classes,
we can see that investor preferences are
highest for deposits, domestic investment
funds and domestic equities, but lowest for
overseas equities, overseas investment funds,
and derivative products. This shows that
Korea's wealthy have become more wary of
high-risk and overseas assets, especially in
light of ongoing uncertainties in global finan-
cial markets, and are more confident in the
relative strength of Korea's domestic market.
When asked about 2011 returns on their
investment portfolios, 51% said they ach-
ieved positive returns for the year; 46% said
8
Mar 2012 Hana Insight
[Figure 13] Real Estate Investment Preferences
of Respondents
[Figure 14] Areas Where Respondents Intend to
Invest in Real Estate
Officete l16%
Building/RetailSpace47.4%
Land13 .9%
Apartment(Investment)
10.7%
Apartment(Residence)
11.2%
Overseas Real Estate 1 .1%48.7%
21.0%
19.6%
6.1%
4.6%
Seoul(Kangnam)
Seoul(Kangbuk)
Seoul MetroArea
6Metropolitan
Cities
OtherRegions
Source: Hana PB Survey 2011 Source: Hana PB Survey 2011
they had returns of 10% or less, whereas
30% said they had losses of 10% or greater.
Considering such tepid returns, it should not
come as a surprise that they had generally
lowered their return expectations for 2012. In
fact, a slight majority of respondents said
they expect to achieve returns of 5-10% in
2012. Indeed, such caution appears to be in
line with their increased allocations to
low-yielding bank deposits, perhaps reflecting
their relatively conservative expectations in
light of continued risks out of Europe and
increased chances of a global economic
slowdown. It should be noted that these re-
sults are in contrast with those of the Hana
PB Survey conducted right after the collapse
of Lehman Brothers in 2008, in which the
vast majority of respondents expected
one-year returns of over 10%, with 60% ex-
pecting 10-15%, and 18% expecting 15-20%.
When asked what type of real estate they
owned, most respondents said that the largest
proportion of their investments was their pri-
mary residence; this was followed by in-
come-producing real estate. When asked what
types of real estate they intended to invest
in during the coming year, 63.5% said in-
come-producing real estate such as office
buildings, retail buildings or officetels, with
overwhelming preference for office buildings
or retail buildings, given they provide a bet-
ter opportunity for capital gains than
officetels.
Of survey respondents, 53.4% hold real
estate in the Kangnam area. Indeed, almost
half of those respondents who expressed
their intention to invest in real estate ex-
pressed a preference for the Kangnam area.
This shows that, despite general expectations
that a sluggish economy and strengthened
measures to counter household debt will
9
Feature
[Figure 15] Main Concerns of Respondents
Regarding Gifts/Inheritance
[Figure 16] To Whom Respondents Intend to
Transfer Their Wealth
57.0%
31.6%
4.1%
2.4%
8.1%
Concerns About Ability toManage Wealth
Concerned Children W illLose W ill to Work
Fear Children W ill IgnoreParents
Concern About Others'Opinions
Other
6.2%
4.3%
3.5%
1.9%
84.9%Give Equally to Each Child
G ive to Child Who TakesCare of Parents
G ive to Child Who IsKindest to Parents
G ive More to Sons
G ive Mainly to Eldest Child
Source: Hana PB Survey 2011 Source: Hana PB Survey 2011
have a slowing effect on the overall real es-
tate market, their belief in the resiliency of
the Kangnam housing market has not waned.
Attitudes towards gifts and in-
heritance
As 48.4% of survey respondents were 60
years or older, it should not be surprising
that they are interested in gifts/inheritance
issues. An overwhelming percentage, 93.1%,
said they plan on passing their assets to
their children, while 9.9% and 2.8% said
they would give their assets to their spouses
and grandchildren, respectively.
As for the types of assets they intend to
transfer, 57% said real estate, 37% said cash
or deposits, and 12.6% said securities. In
general, those over 60 are more likely to
transfer real estate assets. Meanwhile, in the
case of business owners, a large proportion
responded that they plan to transfer their
ownership and management rights, showing
that many wealthy business owners want to
keep their business in the family.
Of those who said they plan to transfer
their assets to their children, 57% expressed
concern about their children's ability to prop-
erly manage their gifts/inheritance, and this
concern was even stronger for the wealthiest
respondents. Another 31.6% of respondents
said they are worried that giving gifts/in-
heritance to their children could cause them
to lose their desire to work. Somewhat sur-
prisingly, 5.2% of respondents said they did
not plan to leave an inheritance to their fam-
ily members, but rather to donate their
wealth to charity or a social cause.
Conclusion
As can be seen from the results of the
survey, the typical Korean HNWI tends to
10
Mar 2012 Hana Insight
possess certain traits. First, they tend to rely
on banks more than other financial in-
stitutions to take care of their wealth man-
agement needs. Second, they tend to prefer
investing in real estate over financial assets.
In particular, they tend to prefer in-
come-producing real estate such as office
buildings or retail space over officetels - an
indication that they seek capital gains in ad-
dition to rental income. Third, Korea's weal-
thy have become more risk-averse since the
financial crisis, and this can be seen in their
allocations to various asset classes as well as
their preferences within a risky asset class
such as equities.
Korea's wealthy class will continue to
grow at a steady pace, and for those finan-
cial firms that are leaders in providing
wealth management services to such clients,
the rewards should be plentiful. Of course,
capturing this class of customers will not be
easy, but will require constant effort to un-
derstand the needs of wealthy individuals
while delivering tailored services in such a
way that can earn their trust and loyalty.
11
Issue
How Much a Threat Is Korea's Household Debt?
As Korea's household debt continues to rise, so too has the intensity of the debate surrounding
the severity of the problem. Regardless of one's views, there should be no question that it
warrants serious attention, especially since excessive household debt has shown its potential to
grow unattended, eventually causing serious shocks to the financial system and economy. As
the problem is complex, this article seeks to provide a brief overview while focusing in on
those areas that are easily unnoticed yet that harbor latent risks, such as loans to low-credit
households and self-employed individuals, as well as mortgages that are excessive in relation to
the incomes or repayment abilities of borrowers.
Wanjoong Kim, Fellow Warren Park, Senior Researcher
Despite attempts at regulation, Korea's household debt problem
continues to balloon
Korean household debt stood at ₩1,103
trillion as of the end of 2011.1) Though last
year's measures to curb household lending by
the banking sector succeeded in slowing the
rate of growth somewhat, the result has been
a shift in demand to the non-banking sector
(such as savings banks and credit coopera-
tives), where household lending has surged
as the quality of new loans has declined.
To deal with this unintended effect, the
government has been discussing plans to re-
strain household lending by non-bank finan-
cial institutions. Such an approach creates
another set of problems, however, partic-
ularly since much of the recent growth in
household debt has gone to people with low
credit ratings in the form of unsecured loans.
Given that they typically do not qualify for
bank loans, restricting lending by the
non-bank sector would leave them without
viable sources of credit, thereby making it
harder for them to make ends meet, and
hence pushing them further toward delin-
quency, default or other personal hardship.
As this example shows, papering over the
household debt problem in one sector can
cause it to pop up in another. Because
household debt has grown into a complex
and multi-faceted problem, however, devising
solutions will not be easy. Thus, it is crucial 1) Throughout this article, the term "household debt" refers to "personal financial debt," as defined by the Bank of Korea, and which includes
pure household debt, debt held by self-employed individuals, and debt held by non-profit organizations.
12
Mar 2012 Hana Insight
[Figure 1] Household Debt Outstanding and as a Percentage of Disposable Income
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Household Debt (\tn) 535.8 561.8 586.1 647.1 717.2 795.3 868.1 930.6 1,011.0 1,103.5
(Growth Rate, %) 4.8 4.3 10.4 10.8 10.9 9.1 7.2 8.6 9.1
Nominal GDP 720.5 767.1 826.9 865.2 908.7 975.0 1,026.5 1,065.0 1,172.8 -
HH Debt/Nom. GDP 74.4 73.2 70.9 74.8 78.9 81.6 84.6 87.4 86.2 -
HH Debt/DI 1.31 1.27 1.23 1.29 1.38 1.46 1.50 1.55 1.58 -
Note: HH (Household) Debt refers to the "Personal Financial Debt" category of BOK; DI = Disposable Income
Source: Bank of Korea (BOK), Hana Institute of Finance
that the government and the financial sector
acquire a better understanding of this prob-
lem so that they can devise appropriate
measures that move beyond short-term rem-
edies and attempt to resolve the problem in
a comprehensive manner that encourages
gradual, rather than abrupt, deleveraging in
the household sector.
Why has Korea's household debt
grown so much and so quickly?
The ongoing and rapid growth in Korea's
household debt can be attributed to a variety
of factors, including the sharp increase in
self-employed people - a trend that finds its
origins in the wave of layoffs stemming
from the Asian financial crisis; intense com-
petition among domestic financial firms to
expand their lending; the low interest rate
environment that has been in place since the
early part of last decade; and growing de-
mand for residential mortgages spurred large-
ly by ever-rising housing prices.
From 2002 to 2011, Korea's household
debt grew by around 100%, much faster
than nominal GDP, which grew by only
70%. The result has been a rapid and pro-
nounced increase in the ratio of household
debt to annual income. As of the end of
2010, for example, the ratio of household
debt to disposable income stood at 158% - higher than most major economies.
Policy measures have only delayed the problem; a more fundamental
solution is needed
Since the global financial crisis, many
major economies have experienced some de-
gree of deleveraging, with household debt ei-
ther slowing or outright declining. Korea's
household sector, however, has not experi-
enced such a deleveraging. This is largely
13
Issue
[Figure 2] Growth in Household Lending by
Non-Bank Institutions
[Figure 3] Comparison of Rates on Bank and
Non-Bank Unsecured Loans by Credit Rating
8.5
17.9
23.521.1 21.7
33.7
0
10
20
30
40 (%)
Banks Non-Banks
FinanceCo's
MutualCredit
SavingsBanks
Comm.CreditCoops
Growth in Household Lending(1/1/2010 - 6/30/2011)
0
5
10
15
20
25
30
35
1 2 3 4 5 6 7 8 9 10
(%) BanksNon-Banks
Credit Rating → LowerHigher ←
1~4Avg. = 11%
5~6Avg = 15%
7~10Avg = 17%
Source: BOK Source: BOK
due to the constant efforts of the government
to stabilize housing prices - by relaxing
rules on mortgage loans, which account for a
majority of household debt; easing regu-
lations on housing construction; or providing
tax incentives for homebuyers. For its part,
the financial sector has followed the gov-
ernment's lead in prolonging the household
debt problem. In the wake of the global fi-
nancial crisis, for example, Korea's lenders
extended the interest-only grace periods and
maturity schedules on most mortgage debt,
giving borrowers more breathing room but
doing nothing to induce a gradual
deleveraging. So while such actions by the
government and financial sector have pre-
vented a disorderly deleveraging thus far,
they have also caused the household debt
problem to grow larger and potentially more
difficult to manage in the future.
Korean household debt's potential stress points lie in three main areas
To better understand where the greatest
risks in Korea's household debt problem lie,
it can be helpful to focus on three sub-sec-
tors: (1) loans to low-credit households, (2)
loans to the self-employed, and (3) structural
weaknesses inherent in Korea's home
mortgages.
As mentioned above, non-bank loans to
households with low credit ratings have been
surging recently - a problem because they
carry very high rates of interest.2) Notably,
outstanding loans to low-income households
(annual income of ₩20 million or less) ac-
count for only around 12% of household
debt outstanding, but they accounted for 37%
of the growth in household loans from the
beginning of 2010 through June 2011.
2) Assuming the same credit rating, the average rate in the banking sector on unsecured loans is 9.8%, whereas it is 24.8% in the non-banking sector - a difference of around 2.5 times. The spread widens even more for individuals with lower credit ratings.
14
Mar 2012 Hana Insight
[Figure 4] Average Annual Growth Rate in
Disposable Income and Sources of Income
[Figure 5] Comparison of Debt Held By
Self-Employed and Employed Households
11.8
5.7
12
7.3
4.2
10.9
1.3
16.3
0
3
6
9
12
15
18
1990-1999 2000-2009
Disposable Income
Employment Income
Investment Income
Self-Employment Income
(%)Self-Employed
HouseholdsEmployed
Households
Share of Households that Hold Debt
74.2% 70.6%
Average Debt \113.95mn \71.94mn
Debt as Percentage ofFinancial Assets
1.33x 0.83x
Debt as Percentage ofTotal Assets
0.23x 0.22x
Debt as Percentage of Disposable Income
2.57x 1.67x
Source: BOK, Statistics Korea Source: BOK, Statistics Korea
Considering that the majority of low-credit
households are also low-income, their pay-
ment burdens could become unsustainable,
leading to rising delinquencies or losses for
the non-bank sector.
The growth in loans to Korea's self-em-
ployed also poses potential risks. To illus-
trate, Korea has an unusually large self-em-
ployed population - 31.3% of the labor
force versus an average of 15.8% in OECD
countries - and the sector accounts for a
large portion of the recent surge in house-
hold debt. This can be a problem because
stagnant domestic demand has forced many
of them to borrow money for working capi-
tal purposes, even though they tend to have
more debt per financial assets or disposable
income than regular workers. Such conditions
may make it more difficult for them to
make debt payments in the event of econom-
ic or financial distress.
Mortgages remain the elephant in
the room
Of course, the greatest sources of vulner-
ability in Korea's household debt dwell with-
in the residential mortgage market. Given
that the surge in housing prices that began
in the early 2000s has been correlated with
the rapid growth in home mortgage, it is
likely that the housing market will serve as
a key barometer in the direction of house-
hold debt going forward.
The main problem with Korea's mort-
gages lies in their structure, as they have
tended to be mostly variable rate and bul-
let-type, which leaves borrowers particularly
vulnerable to rising interest rates or the ma-
turity of principal. Although recent efforts
have lowered the percentage of total mort-
gages that are bullet-type, they still comprise
39% of outstanding mortgages. For the rest
15
Issue
[Figure 6] Loan Amount as Share of Income and
Share of Overborrowers
[Figure 7] Average Loan Amounts Before and
After DTI Regulations by Amount of Collateral
17.1
27.4
48.5
38.5
189
360
285
255
0
10
20
30
40
50
60
\300mn orBelow
\300-600mn
\600-900mn
Above\900mn
(%)
0
100
200
300
400(%)Percentage ofOverborrowers (L)Loan Amount/Income (R)
67 .8
102 .2
136 .6
208 .7
53 .6
117 .4
186 .7
294 .9
0
50
100
150
200
250
300
350
300mn orBe low
\300-600mn
\600-900mn
Above900mn
(\mn) After DTIRegulationsBefore DTIRegulations
Source: Kis-value, Hana Institute of Finance Source: BOK, Statistics Korea
of mortgages that are amortized, 84% are
still in their grace period and thus require
interest payments only.
Once borrowers are required to make
principal payments, however, the structural
weaknesses of Korea's mortgage market will
become more evident. According to the most
recent Survey of Household Finances, 31%
of households that hold bullet-type mortgages
say they will be unable to repay the princi-
pal upon maturity, while 23% say they will
need to sell their home in order to pay off
their mortgage. Thus, if the maturities are
not extended or underlying homes cannot be
readily sold, there could be a rise in mort-
gage delinquencies or defaults.
Korea's mortgages are closely tied
with a variety of potential risks
Although it had been assumed by many
that high-income households would be im-
mune to household debt issues, there is evi-
dence to suggest that a portion of them may
be vulnerable to maturing bullet-type struc-
tures or because they borrowed excessively
in the past for speculative purposes. In par-
ticular, recently released data show that, in
the years leading up to the global financial
crisis, the higher the price of the home, the
more these speculative borrowers took out in
mortgages relative to income. The data also
show that debt-to-income ratios increased as
the prices of underlying homes increased, but
fell after DTI regulations were introduced in
2006. This suggests that these regulations
were helpful in stemming a fair amount of
speculative demand.
16
Mar 2012 Hana Insight
There is also the issue of the sizable por-
tion of homebuyers who combined mortgages
with jeonse funds (lump-sum deposits in lieu
of monthly payments) received from
long-term renters to make their purchases.
Although the official LTVs on such mort-
gages appears to be relatively low, if the
two sources of funds are combined, it is es-
timated that such LTVs would exceed 80%.
Thus, there could be more risk in such
structures than is evident in official LTV
ratios.
On a somewhat longer-term basis, the ag-
ing of Korea's population could be another
latent risk. Retired households in Korea have
over 90% of their assets tied up in real es-
tate, so many retired households do not have
adequate financial assets for retirement.
Herein lies a potential vulnerability, as this
lack of funds for retirement expenses could
force a portion of retirees to sell their homes
in the event of a significant drop in housing
prices.
Conclusion and Recommendations
Recently, ongoing stagnation in the hous-
ing market, particularly the Seoul Metro
Area, has stirred some politicians to make
the case for looser DTI regulations to stim-
ulate the housing market. As we have seen
before, however, such measures may support
the housing market and improve conditions
for related industries, but the effects are like-
ly to be short-lived and will do no more
than kick the problem down the road again.
Instead of makeshift measures, the gov-
ernment will need to collaborate with finan-
cial institutions in devising a more compre-
hensive, longer-term approach based on a va-
riety of measures. For instance, they will
need to find better ways of shifting mort-
gage borrowers from variable-rate loans to
fixed-rate loans. They also need to induce
more borrowers to begin paying down their
mortgage principal, while at the same time
making it more difficult for borrowers to re-
finance into mortgages with interest-only
grace periods. They also need to find ways
of bolstering housing transactions and ex-
panding the use of reverse mortgages for the
elderly. Finally, financial institutions will
need to strengthen their own risk manage-
ment and work to slow the surge in house-
hold debt, with greater emphasis on
long-term profits and sustainability.
Although none of these measures alone
will solve the household debt problem, a
combination of them, if well designed and
executed, could go a long way in ensuring a
steady reduction in household debt. The
sooner such bold measures are taken, the
better.
17
Issue
Korea's Real Estate Project Finance Market: Diagnosis and RemediesSince 2010, Korea's financial sector, especially the banking industry, has stepped up its efforts
to manage troubled real estate PF loans. Rather than eliminating the risks, however, the
unintended result has been the gradual transfer of such risks away from the financial sector,
but into the construction industry. Thus, to get to the root of the problem and ensure that
the gradual elimination of PF-related risk in the financial sector results in greater liquidity for
constructions firms, it would be helpful to expand the use of alternative methods such as
public-private partnerships. There is also a need to diversify methods of financing real estate
development projects so that participants share associated risks more evenly.
Jeungrak Sohn, Senior Researcher
[Figure 1] Unsold Housing Units and Home
Prices by Region
[Figure 2] Real Estate PF Lending in the
Financial Sector
-5
0
5
10
15
20
25
2007 2008 2009 2010 2011-5
0
5
10
15
20
25Unsold RegionalHousing Units (R)Unsold SMA HousingUnits (R)Home Prices in Top 5Cities (ex-SMA)Home Prices in SMA
(YoY,%) (10 ,000 Units)
0
20
40
60
80
100
2008 2009 2010 2011.30
3
6
9
12
15
Sec Firms/Asset ManagersInsuranceSavings BanksBanksDe linquency Rate (R)
(\tn) (%)
Source: MLTM, Bank of Korea
Note: Excludes KAMCO's \7.4tn purchase of PF loans
Source: FSS
As housing remains mired in slug-gishness, risks from deteriorating real estate PF loans are cause for
concern
In Korea's real estate development market,
the main source of funding for land and
construction costs has been project finance
(PF) loans, which are granted by financial
institutions to construction companies based
on their credit standing. Since most of these
projects are in the housing sector, their prof-
itability and stability tends to depend largely
on pre-sales of housing units.
18
Mar 2012 Hana Insight
[Figure 3] Real Estate PF Securitization: Amount
Outstanding and New Issuance
[Figure 4] Housing as a Share of Total Real
Estate PF Securitization
0
5
10
15
20
25
30
35
2008 2009 2010 2011.3
ABCP Outstanding
ABS Outstanding
ABCP Issuance
ABS Issuance
(\tn)
0
2
4
6
8
10
09 .1H 09.2H 10 .1H 10.2H 11.1H0
20
40
60
80
100Real Estate PFSecuritizationHousing Share (R)
(\tn) (%)
Source: FSS, Korea Investors Service Source: NICE
Since the global financial crisis, a
drop-off in housing demand has resulted in
ongoing market weakness in the Seoul Metro
Area (SMA), with housing prices decelerat-
ing significantly. As the slowdown has con-
tinued, potential risks stemming from real es-
tate PF loans have increased significantly. In
fact, delinquencies on real estate PF loans
have surged from just 4.4% as of end-2008
to 12.3% in March 2011.
This surge in delinquencies has occurred
despite the fact that, since 2010, the finan-
cial sector, particularly the banking industry,
has made significant progress in reducing its
exposure to real estate PF loans, as part of
its efforts to strengthen risk management and
enhance asset quality. As a result, the out-
standing amount of real estate PF loans from
the financial sector has decreased from ₩83
trillion as of the end of 2008 to ₩59 trillion
at the end of March 2011.
Financial institutions have been call-ing in real estate PF loans, ex-acerbating the liquidity crisis in the
construction industry
As a result of financial institutions calling
in existing PF loans and holding back on
new loans, the second half of 2009 wit-
nessed the beginning of a surge in con-
struction companies' use of direct financing
in the form of securitizations such as ABS
or ABCP. Indeed, such securitization out-
standing grew from ₩9.3 trillion at the end
of 2008, to ₩12.5 trillion at the end of
2009, to ₩16.8 trillion at the end of 2010.
Since the beginning of 2011, however,
there has been a clear decline in the issu-
ance of real estate-related ABS and ABCP,
leaving construction companies with few op-
tions in accessing much-needed liquidity.
19
Issue
[Figure 5] The RTC's Asset Liquidation Method[Figure 6] Liquidation Methods for Land and
Development Project Assets
AssetType
ResidentialCommercial/Multi-Unit Housing
REO3) Non-Investment Grade Securities
1.
CategoryBook Value
Appraised Value
ActualCollections
Recovery Rate
IncomeProducing
Assets
Securi-tization
☞Asset Sales☞Securitization☞Partnerships
☞Asset Sales☞Partnerships
☞Asset Sales☞Sales to Issuer☞Asset
Exchanges/ Auctions
Partner-ship
NPSeries
537 119 145 122%
LandFunds
2,218 640 592 93%
Asset Sales
Bulk Sales 1,057 306 279 91%
Non-Income
Producing Assets
Partner-ships
☞Asset Sales☞Partnerships
Auctions 259 163 122 75%
Sealed Bidding
407 NA 122 NA
Note: Asset sales include individual loan sales, bulk sales,
auctions and sealed bidding
Source: Hyuna Kim, Sangyoung Lee (2011)
Note: Unit = $mn
Source: FDIC (1998), "Managing the Crisis," pp. 450~451
Since a large share of real estate securiti-
zation is related to housing, and the housing
sector remains sluggish, there are growing
concerns about whether such bonds will be
able to be rolled over. Since 2009, 25 of the
largest 100 domestic construction firms have
applied for workouts or court receivership,
demonstrating how deteriorating liquidity
conditions have caused construction company
insolvencies to increase, thereby magnifying
potential risks.
Bad-debt disposal capabilities must be strengthened to enhance liquid-
ity in the construction industry
The construction industry has been taking
measures to improve liquidity conditions; for
example, by selling assets at 10-30% below
initial asking prices. But liquidity conditions
could still deteriorate further. To illustrate,
outstanding PF-related contingent liabilities of
construction companies connected to existing
projects alone amount to around ₩19.5 tril-
lion in the Seoul Metro Area and ₩6.8 tril-
lion in other regions.
Because of the possibility of further asset
deterioration, it is not easy for the private
sector to provide additional liquidity. Thus,
the publicly-funded Korea Asset Management
Corporation (KAMCO) and the United Asset
Management Company (UAMCO) have been
purchasing non-performing real estate PF
bonds with the dual goal of enhancing asset
quality in the financial sector and providing
liquidity to the construction industry.
Unfortunately, most of the purchases have
been from the financial sector, and the scale
of buying has been limited, with KAMCO
3) REO ("Real Estate Owned") refers to real estate that has become a possession of the lender after a borrower has defaulted.
20
Mar 2012 Hana Insight
and UAMCO purchasing a total of ₩7.4 tril-
lion and ₩1.2 trillion worth - a relatively
small portion of total PF debt. It would
therefore be helpful if these public asset
management companies acquired more
non-performing debt from the financial sector
and promoted the sale of such assets in the
market, thereby enabling the financial sector
to provide greater liquidity support to the
construction industry.
The experience of the RTC in the US can provide a useful model for the
resolution of bad PF debt
In the late 1980s, the Resolution Trust
Corporation (RTC) was formed in the United
States as a means of taking over the bad
debts of insolvent S&L associations and dis-
posing of them. The RTC used a variety of
methods for such liquidations, including as-
sets sales, securitization, and public-private
partnerships. Of particular note was the
RTC's use of the partnership format for the
disposal of the thrifts' bad debts - a method
which the RTC pioneered. Using this meth-
od, the RTC established a fund with private
investors, purchased distressed assets, and al-
located the profits from their disposal among
investors. Private investors involved in the
partnerships included financial institutions, in-
stitutional investors and real estate
developers.
In all, the RTC established 72 separate
partnerships and disposed of $21.4 billion in
non-performing assets, and the partnerships
were particularly useful in disposing of
non-income-producing assets that are difficult
to price, such as land and development
projects. Through the use of a variety of liq-
uidation methods and the expanded invest-
ment from the private sector, the RTC was
able to dispose of the assets of insolvent
thrifts on a large scale in a relatively effec-
tive manner. In fact, the RTC's recovery rate
on land and development assets was around
75-122% of their appraised value.4)
The use of partnerships should be expanded to support construction companies' liquidity needs and
growing amounts of distressed debt
In Korea, KAMCO has plans to diversify
the disposition methods of distressed PF sites
through the use of partnerships with financial
institutions, construction companies and real
estate developers, but the scale of such ef-
forts remains very minor. Of the 338 PF
sites that it has purchased from savings
banks, only ten have been handled through a
partnership format.
4) In valuing non-income-producing assets, the RTC applied Derived Investment Value (DIV), subtracted operating costs from the value, then applied a 12-25% discount in determining the price.
21
Issue
The benefits of a public-private partner-
ship format are twofold: First, given that the
market remains downtrodden, it is difficult
for the private sector to dispose of distressed
assets alone. Second, there is a limit in the
amount of public funds available. Thus, in
order to provide more liquidity to con-
struction companies while strengthening the
level of preparedness against a potential in-
crease in distressed PF loans, the private
sector will need to take on an expanded role
through efforts such as public-private
partnerships.
The industry needs to develop new structures to replace the PF method
of financing real estate development
Since the global financial crisis, the de-
mand for real estate has declined and poten-
tial project participants have become more
risk-averse. Considering that project financing
relies heavily on pre-sales of housing units
and the credit standing of construction com-
panies, the result has been a slowdown in
project financing. In response, there have
been ongoing efforts to incorporate new
structures into development deals, such as
having financial institutions play the leading
role in development projects, establishing
large developers or self-managed develop-
ment REITs, or establishing investment funds
specialized in real estate development.
However, because the real estate market re-
mains sluggish, and there are no wide-reach-
ing mechanisms for diversifying or alleviat-
ing the risks of projects, the search for a
clear alternative continues.
Developing new business models and diversifying financing methods
could help reduce risks
To cope with the growing uncertainty and
volatility in the real estate market, there is a
need to develop new business models that
can help ensure stable cash flows throughout
the development process. Since cash flows
come mainly from two sources - revenue
and financing - there is a need to develop
business models that seek to diversify sour-
ces of revenue as well as financing methods.
One way of achieving this is to ensure that
investors play a larger role in the develop-
ment process.
Regarding diversification of revenue, de-
velopers would be well-served to change
their business plans by placing less reliance
on housing, which tends to rely on upfront
income from pre-sales, and focusing more on
developing real estate that generates rental
income, such as office buildings, retail space
or hotels.
22
Mar 2012 Hana Insight
[Figure 7] Private Sector Efforts to Diversify the Structure of Development Projects and Project Financing
Major Trends
Banks
Cutting back on real estate PF lendingInvesting more conservatively (reduce amounts invested in development projects, strengthen ability to conduct feasibility analyses)Disposing of distressed PF loans through, for example, the establishment of "bad banks"
InstitutionalInvestors
Securities firms and insurance companies are reducing lending and strengthening management of existing loans in response to a spike in loan delinquenciesSelectively investing equity in and directly managing development projectsParticipating in the public-private co-development partnership program led by KAMCO
Construction Companies
Industry restructuring underway, with 25 of the largest 100 construction companies applying for workouts or court receiverships since 2009After reduction in PF lending by financial institutions, increasingly issuing securitized products such as ABS or ABCP for financingIncreasingly obtaining third-party payment guarantees to reduce risks from development projects
Real Estate Developers
Working to establish larger development companies with advanced RE development capabilities (asset management plus asset development, etc.)Investigating new business structures such as self-managed development REITs and real estate trustsSome corporations that own real estate are working to establish an RE development companySeveral overseas-based real estate funds are considering entering Korea's RE development market
Source: Hana Institute of Finance
As for diversification of financing meth-
ods, expanding the use of partnerships be-
tween professional investors and landowners
would be effective. The use of partnerships
can be helpful in enhancing the overall sta-
bility of a real estate development project,
especially in the initial stages, as it can re-
duce the required amount of development
capital by letting landowners invest their
land in exchange for equity in the project.
When developing commercial real estate,
for which cash flows can be valued, it can
be helpful to utilize long-term mortgage
loans that pay for construction costs on an
incremental basis using operating income as
collateral.
Finally, it would be advisable to establish
investment funds that specialize in real estate
development, such as certain private equity
real estate funds in the US or Europe, as
this will help to strengthen investment ex-
pertise by enabling more active involvement
by a group of professional institutional
investors.
23
Issue
Big Changes Afoot for Korea's Financial Industry
After many years of struggle and failed attempts, Lone Star has finally succeeded in offloading
its stake in Korea Exchange Bank (KEB) to Hana Bank, which hopes its acquisition will help it to
realize its ambitions of becoming a much larger player in Korean banking. Meanwhile,
Nonghyup has split itself into two holding companies: agribusiness and financial services; this
should free it up to be more aggressive in expanding its bank and non-bank financial
subsidiaries. These seismic shifts, along with the removal of KDB and IBK from the list of public
institutions, suggest that Korea's financial services industry is in for major structural changes
that will have a significant impact on the competitive dynamics of Korea's financial sector.
Jaeman Song, Associate Researcher Warren Park, Senior Researcher
Recent events could have a tremen-dous impact on the competitive
landscape of Korea's banks
Banks around the world are facing a host
of uncertainties fueled by the ongoing crisis
in Europe, sweeping regulatory changes, and
other factors. Likewise, Korean banks face
their own challenges, namely fierce competi-
tion within a crowded domestic banking mar-
ket, low net interest spreads, and public
pressure on banks to lower various fees. In
response, they have been actively pursuing
means of expanding their revenue sources by
diversifying into new lines of business and
expanding overseas.
Against this backdrop, there has been a
series of events recently that could have a
considerable impact on the industry. In par-
ticular, Hana Financial Group has acquired
Korea Exchange Bank (KEB), giving it
greater market share and competitive power,
while Nonghyup Agricultural Cooperative
Federation (NACF) has separated its agri-
business operations from its financial busi-
nesses, which have been grouped together in
a newly formed financial holding company.
In other news, Korea Development Bank
(KDB) and Industrial Bank of Korea (IBK)
have been taken off the list of public in-
stitutions, thus granting them more autonomy
in their operations. These changes suggest
that competition in the banking and
non-banking financial industries is about to
heat up; it will be interesting to see how
these changes impact the competitive land-
scape of Korea's financial sector.
24
Mar 2012 Hana Insight
[Figure 1] Total Assets of Korean Banks [Figure 2] Domestic and Overseas Branches
260.1 258.7233.5
220.4
156.4
102.3
0
100
200
300
KB Hana (+KEB)
Woori Shinhan Hana KEB
(\tn)
1,156
1,007 966 932
11 38 19 220
200
400
600
800
1,000
1,200
1,400
KB Hana + KEB Shinhan Woori
Domestic
Overseas
Note: Total Assets are as of end-September 2011.
Source: FSS Source: FSS
The merger of Hana and KEB creates
a new giant in the industry
For the past few years, KB, Woori,
Shinhan and Hana were considered to be the
"Big 4" banks, accounting for 63.8% of do-
mestic deposits. In reality, though, Hana
placed a distant fourth, as its total assets
were about ₩80 trillion less than Shinhan
(#3); this is why many industry observers re-
ferred the Big 4 as the "Big 3 and 1
Medium." Now that Hana has acquired KEB,
however, the combined bank has total assets
of ₩258.7 trillion - a close second only to
KB, which has ₩260.1 trillion in assets. In
addition, the combined entity now has 1,007
branches, second only to KB's 1,156, thereby
enabling it to leverage a much larger retail
network. Thus, with four banks now in the
true Top 4, it seems inevitable that competi-
tion in the industry will heat up.
Initial analysis of Hana Financial Group's
acquisition of KEB suggests that it was a
sound strategic move, since Hana Bank can
merge its strengths in retail banking with
KEB's strengths in foreign exchange and
trade finance, enabling each bank to fill gaps
in the other's businesses and thereby generate
synergies. In particular, Hana Bank, which
has been accelerating its overseas expansion
efforts, will try to leverage the overseas
branch network of KEB in order to give it-
self expanded global reach. The combined
entity will have 38 branches in 22 countries,
by far the most of any Korean bank. In ad-
dition, through its acquisition of KEB, Hana
Financial Group's overseas assets now top
₩36 trillion, placing it ahead of other
Korean financial groups such as Woori (₩22
trillion) and Shinhan (₩19 trillion).
25
Issue
[Figure 3] Key Indicators for Major Credit Card
Companies in Korea
[Figure 4] Total Assets of Korea's Financial
Holding CompaniesTotal Assets(Avg.)
Purch. Vol.
\(tn)
Market Share(%)
Customer Accounts
(mn)
Merchants(mn)
372.4 366.5 363.6337.3
240
0
100
200
300
400
500
Woori Hana KB Shinhan NH
(\tn)Shinhan
Card21.9 95.2 22.94 15.43 264
KB Card 12.8 57.7 13.90 10.40 212
Samsung Card
15.7 53.4 12.86 10.81 244
Hyundai Card
9.6 52.4 12.63 9.30 191
HanaSK +KEB Card
8.0 34.5 8.29 10.77 249
HanaSK
5.6 21.8 5.24 7.22 40
KEB 2.4 12.7 3.05 3.55 209
Note: Data cover period from 1/1/2011 to 9/30/2011
Source: FSS, CREFIA, Individual company data
Note: Total Assets includes trust accounts
Source: FSS, Company Data
In the credit card business, the tie-up be-
tween HanaSK Card, which has a weak cus-
tomer base and does not have its own pay-
ment network, and KEB Card, which has its
own payment network with over two million
merchants, will give the combined entity a
market share of around 9%. The combination
should generate significant synergies and
give rise to a stronger competitor to current
market leaders Shinhan Card and KB Card.
Of course, making the merger a success
will require strong organizational planning
and management. Though Hana Financial
Group has granted KEB the right to main-
tain its brand and retain the bulk of its per-
sonnel, it must still work to integrate the
management and cultures of the two organ-
izations - a crucial yet formidable task. To
move in the right direction, HFG and KEB
will need to develop measures to enhance
mutual understanding at the cultural and or-
ganizational level. Also, given that the banks
have agreed to maintain a "two bank" struc-
ture (two separate banks under one financial
holding company) for at least five years,
Hana Financial Group may need to make
some modifications to its matrix organiza-
tional structure.
The split-up of Nonghyup will create
a new financial holding company
Along with Hana's acquisition of KEB,
the other main event in the financial industry
in the first quarter of 2012 was the separa-
tion of the financial and agricultural busi-
nesses of Nonghyup (NCAF), which has led
to the creation of the NH Financial Group.
Historically, Nonghyup has been known pri-
26
Mar 2012 Hana Insight
[Figure 5] Nonghyup's Structure Before & After the Separation of Its Agricultural & Financial Businesses
Source: Hana Institute of Finance
marily for its agricultural business. But as
the financial side of the company expanded,
there were increasing calls for the separation
of the two areas of business, with the idea
first proposed in 1994. It was not until
March 2, 2012, however, that Nonghyup fi-
nally split itself and relaunched as two sepa-
rate holding companies. The financial side of
the business, NH Financial Group, has total
assets of ₩240 trillion, ranking it fifth be-
hind the financial groups of Woori, Hana,
KB and Shinhan.
Before taking on its new form, NACF
comprised four businesses: Education &
Support, and the Agricultural, Livestock and
Credit businesses. Under the new system,
however, it is composed of two separate
holding companies (Agribusiness and
Financial Business), as well as Education &
Support and Credit. Under the new structure,
NH Agribusiness Group will handle agricul-
tural supply and distribution, whereas NH
Financial Group will handle financial serv-
ices through subsidiaries such as NH Bank,
NH Life, NH Fire, NH Securities, NH
Futures, NH Asset Management and NH
Capital.
NH Bank has traditionally raised funds in
urban areas and used them to provide fi-
nancing, education and other types of sup-
port to farming and agriculture in rural
areas, where it is most needed. Through its
extensive rural network, it has built holdings
of ₩195 trillion in total assets and 1,172
outlets. If its cooperative banking business,
which is technically not part of the banking
sector, is combined with its banking oper-
ations, Nonghyup's holdings rise to ₩450
trillion in assets and 5,600 outlets. Thus, it
can be considered a powerhouse in Korea's
financial industry.
27
Issue
One factor that distinguishes Nonghyup
from the pack is its strong nationwide net-
work of banking outlets even in rural areas,
whereas other major banks have their
branches concentrated mainly in the Seoul
Metro Area. Nonghyup's nationwide reach
ensures that it has the scale necessary to be
a formidable competitor to other top banks.
In particular, it could become a legitimate
threat to leading banks if it expands its
branch network in the Seoul Metro Area.
Nonghyup's new structure is also expected
to benefit NH Life, whose ₩33 trillion in
assets already puts it in fourth place among
life insurers, but whose new identity as part
of a financial holding company gives it the
ability to utilize the bancassurance channel
of Nonghyup's nationwide network of
branches. This is expected to change the
competitive landscape of the industry.
However, if Nonghyup is to follow in the
footsteps of a company like Credit Agricole
- which grew from an agricultural coopera-
tive into a global player, and which is often
seen as a role model for Nonghyup's finan-
cial ambitions - its subsidiaries such as NH
Bank and NH Life will need to overcome
some important challenges.
For example, NH Bank is less productive
than other banks, as shown by its per-em-
ployee assets of ₩14 billion, deposits of
₩10.4 billion, and loans of ₩9.5 billion. Its
risk management capabilities are also consid-
ered less developed than other banks, and its
IT systems have frequently been faulted for
provide unstable service.
NH Life's main weakness is the size of
its salesforce, which it will need to expand
in order to increased its sales of highly prof-
itable guarantee-type products. Currently, it
only has around 1,500 sales advisors, even
less than many medium-sized competitors.
Contrast that with Samsung Life, which has
38,000; Daehan Life, which has 25,000; and
Kyobo Life, which has 23,000. NH Life will
also need to provide its salesforce with on-
going education and training.
Removing KDB and IBK from the list of public institutions will give them
more autonomy
In other news, the Korea Development
Bank (KDB) and the Industrial Bank of
Korea (IBK) have been taken off the list of
public institutions, a move that should enable
them to make more managerial decisions that
are independent of government oversight. For
example, it grants them more freedom in
making personnel decisions. It also gives
them more freedom to expand their retail or
investment banking operations.
28
Mar 2012 Hana Insight
[Figure 6] NH Life's Position in the Industry [Figure 7] Change in SME Loans by Bank Type
0
40
80
120
160
Samsung Daehan Kyobo NH ING M irae0
5
10
15
20
25
Total Assets (L)
Insurance Premiums (R)
(\tn) (\tn)(Unit: \tn) 2006 2007 2008 2009 2010
Commercial Banks
30.8 50.6 30.9 7.7 -5.4
Special Banks
14.2 17.4 22.5 13.4 3.0
PolicyBanks
10.9 11.2 12.6 12.6 5.8
IBK 10.1 9.0 7.6 10.4 5.2
Source: KLIA, NACF
Note: IBK, KDB and Korea Eximbank are policy banks
Source: FSS
However, removing these banks from the
list of public institutions could potentially
open another can of problems. Based on
their public charters, the two banks have
served a public purpose by lending to sec-
tors or projects that commercial banks do
not find attractive. IBK, for example, has
been a leading lender to SMEs, whereas
KDB has played a major role in financing
important public infrastructure or other devel-
opment projects. Now that they have been
taken off the public institutions list, however,
there is the risk that they could reduce their
public role, leaving SMEs and important
public initiatives with fewer credit options.
In order to avoid such a scenario, it would
be advisable to allow them to pursue their
commercial interests while also providing
them with incentives to maintain their im-
portant role as public-oriented lenders.
The outlook for Korea's banking in-dustry is fraught with ambitions and
uncertainties
With Hana's acquisition of KEB, the
competitive landscape of Korea's banking in-
dustry has changed from a Big 3 to a Big 4
structure, whereas NACF's split into agricul-
tural and financial businesses adds another
financial holding company to the mix and is
thus likely to transform the competitive land-
scape at the financial holding company level.
For KDB and IBK, their removal from the
list of public institutions should give them
more room to beef up their retail banking
operations, which should also raise the level
of competition in the sector.
As more financial holding companies en-
ter the competitive scene, they will continue
to diversify their business lines and expand
into new markets. In particular, as bank
29
Issue
profitability has stagnated recently, financial
groups are likely to continue their march in-
to non-banking financial sectors, while focus-
ing on operational and organizational re-
structuring to generate greater synergies be-
tween their banking arms and non-banking
subsidiaries.
Moreover, Korea's banks and financial
holding companies will continue to push into
overseas markets. Even though the ongoing
rush to expand into overseas is likely to be-
come more intensified, it is likely to benefit
Korea's banks in two major ways: First, be-
cause Korea is a small and open economy,
it remains vulnerable to external financial
shocks. Successful overseas expansion can
help Korea's banks to secure more stable
sources of foreign currency-denominated
funding, thereby providing Korea's financial
system with bolstered defenses against global
financial stability or external shocks.
Second, because of its small size, Korea's
banking market is plagued by lower growth
expectations as well as intensified
competition. As such, they will need to con-
tinue to seek out new sources of growth in
overseas markets.
30
Mar 2012 Hana Insight
Korea's Long-Term Solar Prospects Shine Bright
After growing at a steady pace through 2010, the global solar photovoltaic (PV) industry
deteriorated sharply in the second half of 2011 owing to a precipitous drop in European
demand combined with excess supply. Industry conditions will likely continue to worsen in 2012,
forcing the bankruptcy of many weaker companies, but an upturn in US and China demand
should allow the industry to recover in 2013. Moreover, technological advancements and the
pace of the recovery suggest that solar PV could reach grid parity as early as 2015, paving the
way to a high-growth phase. Korean solar PV companies, though laggards in the industry, still
have ample opportunity to compete as long as they invest for the long-term.
Hyeyoung Ahn, Senior Researcher
Market conditions in the solar PV in-dustry continue to erode
In the latter half of the 2000s, the eco-
nomics of photovoltaic (PV) power improved
as global PV manufacturers scaled up and
achieved greater vertical integration, enabling
the industry to grow at a blistering annual
average pace of 45% in the 2007-2010
period. This led to a sharp increase in facili-
ties investment around 2010, particularly in
China. Starting in the second half of 2011,
as Europe's woes spilled over into the global
economy and credit markets, however, the
demand for PV power declined precipitously,
causing oversupply conditions to worsen. As
a result, prices along the PV value chain
plummeted by 40-50% over the previous
year, leading to a drop in the capacity uti-
lization of the industry's major players and
significant deterioration in business conditions
overall.
An examination of the solar PV value
chain shows that companies furthest down-
stream took the greatest hit to profitability.
For polysilicon and ingot/wafer producers,
there have been concerns about potential
oversupply stemming from large-scale ex-
pansion of facilities, but considering that the
undersupply of such high purity materials is
expected to continue for a while, related
companies should be able to maintain rela-
tively stable profit margins.
Contrast this with the next link in the
value chain, solar cells and modules, where
already severe oversupply conditions have
31
Issue
[Figure 1] Prices Declines Across the Value Chain[Figure 2] Korea's Solar PV Technological
Sophistication Relative to Advanced Economies
0
0.4
0.8
1.2
1.6
2
P-Si Ingot/Wafer Cell Module
($/W)4Q 2010 4Q 2011
81.4
59.7
49
80.0
0
20
40
60
80
100
P-Si Ingot/Wafer Cell M odule
(%)
Source: Solar PV Green Forum 2011 Source: The Export-Import Bank of Korea
deteriorated further as the economic slow-
down has dented demand. This has thrown
supply and demand even more out of bal-
ance, causing prices and profitability to drop
sharply. Because of such deteriorating con-
ditions in the industry, some of the smaller
industry players that cannot compete on price
find themselves faced with the prospect of
bankruptcy, making a string of insolvencies
in the industry virtually inevitable.
Naturally, Korean PV-related companies
have not been spared from the global eco-
nomic slowdown and the generally deteriorat-
ing conditions in the PV industry, as those
most heavily dependent on exports have seen
growth diminish rapidly. The PV-related ex-
ports of such Korean companies grew at an
average annual pace above 100% in
2008-2010, but such growth is expected to
slow to around 20% in 2011-2013.
The PV market should begin to re-
cover in the second half of 2013
Based on the fact that government sub-
sidies for solar PV power have been reduced
and that European demand is expected to de-
cline by at least 2GW, as well as expect-
ations of slower global growth and limited
demand growth from new markets, over-
supply and falling prices in the PV industry
are likely to continue in 2012. Over the
short term, it is likely that plummeting pri-
ces stemming from excess supply will cause
failures among PV manufacturers unable to
compete either on technological prowess or
price. Beyond the short-term shock, however,
this sort of industry restructuring should help
to gradually ease excess supply conditions.
Plus, with demand in the US and China ex-
pected to increase gradually, the photovoltaic
industry could begin to recover in 2013.
32
Mar 2012 Hana Insight
[Figure 3] Trends in Share of Solar PV Production in the US and China Versus Europe
36.4
8.4
44.0
80.0
0
20
40
60
80
100
2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
(%) US+China Europe
Source: Solar&Energy
The US and China will likely play a leading role in the future solar PV
market
Thanks to solid and aggressive backing
by their respective governments, the photo-
voltaic industries in the US and China have
been growing at an explosive pace. In
China, the government has been active in
providing support to its solar-related compa-
nies for their R&D and facilities expansion,
while also raising ceilings on lending to
such companies. It is also planning to launch
a feed-in tariff system in July 2012, provid-
ing further hope that China's domestic PV
market will be able to grow at a rapid pace.
Considering these types of measures out of
China, it is forecast that the PV installed ca-
pacity in China will grow from 0.5GW in
2010 to 7.0GW in 2015, an annual growth
rate in excess of 70%.
In the United States, the country's vast
supply of desert and other low-cost land can
enable US-based companies to enter the in-
dustry with relatively low initial investment.
Moreover, as the cost of installing PV gen-
eration facilities has fallen recently, various
tax benefits and Renewable Portfolio
Standards provided by the federal and state
governments should help to spur growth, fu-
eling an increase in investment and demand
in 2012. Given these conditions, the United
States' installed PV capacity, which stood at
0.8GW in 2010, is likely to grow by an
average annual rate of about 80% until 2015,
by which time it should reach 8.8GW.
Based on these factors, it appears that the
solar PV markets in the US and China could
experience explosive growth, leading to a
shift in PV leadership from Europe, which
was the previous leader, to the US and
China. In fact, it is forecast that the com-
33
Issue
[Figure 4] Outlook for Solar PV Installed Capacity
2.46.3 7.6
16.619.0
23.0
28.0
34.0
41.0
0
10
20
30
40
50
2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
(GW)
Source: Solar&Energy
bined share of global PV installed capacity
in the US and China could grow from 8.4%
in 2010 to 36.4% by 2015.
Once grid parity is achieved, the in-dustry should enjoy explosive
growth starting around 2015
Owing to the recent sharp fall in the pri-
ces of photovoltaic products, the cost of PV
power generation is beginning to approach
levels indicating grid parity.5) But because
the recent price drop is most likely due to
oversupply as opposed to technical advances
or cost reductions, it is probably temporal in
nature. As such, absent government subsidies,
PV power is still unable to compete on price
with existing grid power.
True grid parity within the solar PV in-
dustry can only be achieved when price
competitiveness is achieved through cost re-
ductions under stable supply-demand
conditions. Based on current PV technologies
and the industry's pace of recovery, grid par-
ity could be achieved as early as 2015.
Once solar PV does achieve grid parity, the
demand for PV power will likely increase by
at least fivefold, so the rapid growth phase
for the industry can be expected to begin
sometime around 2015.
As the solar PV industry is still young, Korean firms still have to
chance to get into the game
As latecomers to the industry, Korea's so-
lar PV companies still lag behind their rivals
in Europe and Japan in terms of technology,
and their rivals in China in terms of price.
Nevertheless, considering that the long-term
growth prospects for the industry are vir-
tually guaranteed, it will be important for
5) Grid parity is the point at which the price of generating power using a renewable energy is equal to or less than that of fossil fuels, absent government subsidies.
34
Mar 2012 Hana Insight
Korean firms to take a long-term view of
the industry and invest accordingly in a se-
lective and strategic manner, rather than bas-
ing their investment decisions on cyclical
changes or trends.
In the case of large firms, rather than
trying to achieve vertical integration immedi-
ately, they should focus investment first in
those areas where they are most competitive;
once they have gained a competitive foot-
hold, they can strategically aim for vertical
integration. Moreover, the recent deterioration
in the industry and its negative impact on
the profitability of many US and Chinese so-
lar PV companies will probably force many
of them to go under. Thus, there should be
ample opportunity for some of Korea's larger
solar PV companies with substantial capital
to speed their entry into the market through
acquisitions of some of these companies.
For medium-size companies with techno-
logical prowess, rather than pursuing crystal-
line solar cells, which requires economies of
scale to compete, it would be advisable to
carve out a strategic position in the market
for thin-film solar cells, where the competi-
tion is not yet as severe.
Big changes in the structure of the
solar PV industry are expected
As downturn in the industry continues, a
good number of solar PV companies in
Europe, China and the United States will
likely fail in 2012. This will open up oppor-
tunities for those companies with a long-term
strategy to move in and either acquire some
of these companies or buy up major stakes
in order to achieve vertical integration or se-
cure needed technologies.
As long as the industry's long-term pros-
pects remain positive, it is likely that solar
PV companies will increase their investment
in new technologies and large-scale manu-
facturing facilities, which will further fuel in-
dustry growth. So just because the industry
is struggling at the moment does not mean
that it is down-and-out. On the contrary, the
industry's future looks rather bright.
35
Market Watcher
Interest Rates: Rates to be kept on hold for an extended period
Wanjoong Kim, Fellow
[Figure 1] Key Interest Rates [Figure 2] ECB Total Assets & Deposits
2.0
2.5
3.0
3.5
4.0
4.5
11.1 11.3 11.5 11.7 11.9 11.11 12.1 12.3
(%)
3Yr KTB91D CDPolicy Rate1Yr Bank Bond
0 .0
0 .8
1 .6
2 .4
3 .2
08.1 08.11 09 .9 10.7 11.5 12 .3
(\tn)
0 .0
0 .3
0 .6
0 .9(\tn)ECB Deposits (R)
ECB Total Assets (L)
2nd LTRO
1st LTRO
Source: FnGuide Source: Bloomberg
Even as uncertainty over negotiations on
the second Greek aid package caused jitters
in global financial markets, the ECB's LTRO
program and other quantitative easing by ma-
jor central banks helped to expand the sup-
ply of global liquidity, spurring a rise in the
risk-on trade. This was evident in Korea as
well, as foreigners increased their allocations
to domestic equity markets while selling
KTB futures, adding to upward pressure on
yields. But even though two rounds of
LTRO were effective in easing global finan-
cial turbulence, they have done little to ex-
pand the provision of credit, as a large por-
tion of the liquidity supplied to banks has
ended up as ECB deposits. Thus, the impact
of such measures on the real economy has
been limited, raising the likelihood that the
economic stagnation in the Eurozone will
continue for an extended period. Meanwhile,
in China, the risk of a hard-landing seems to
have diminished greatly, but given that the
National People's Congress (NPC) recently
announced that it had lowered its 2012
growth target to 7.5%, it appears that the
odds of a global economic slowdown are
rising.
Given the ongoing Eurozone crisis, global
economic slowdown, and heightened geo-
political risks in the Middle East, the Fed
has kept policy rates on hold since July
2011, and expanded global liquidity and im-
proving US economic indicators since
February have reduced expectations for a
lower Fed funds rate. If anything, geo-
political tensions in the Middle East could
36
Mar 2012 Hana Insight
[Figure 3] Residential Mortgages & HH Debt[Figure 4] Cumulative Net Purchases of KTB Futures
by Foreigners & Yield Trends
-4
-2
0
2
4
10 .1Q 10.3Q 11.1Q 11.3Q 12.1
(\tn)
Household Loans
Residential Mortgages
12.2
Annual Avg.\2.00tn
\1.82tn
Annual Avg.
-9
-6
-3
0
3
6
9 2.7
3.0
3.3
3.6
3.9
4.210.10 11.1 11.4 11.7 11.10 12.1
Cumulative Net Purchases ofKTB Futures by Foreigners (L)3yr KTB Yield (R)
(10,000 Contracts) (Reverse Axis, %)
Source: Bank of Korea Source: Thomson Reuters Datastream
cause oil prices to surge, thereby increasing
the need to hike rates. But despite improve-
ment in key economic indicators such as
manufacturing in China and the US, the
European crisis is likely to be prolonged and
the potential for an oil price spike remains,
making it more likely that the Korea's policy
rate will be kept on hold for a while.
In addition, reduced demand for mort-
gages stemming from slowing housing de-
mand and strengthened management of
household debt should lead to slower growth
in household lending, making it less likely
that the Monetary Policy Committee (MPC)
will hike rates, whereas its emphasis on the
importance of inflationary expectations makes
further easing unlikely.
Meanwhile, in addition to rising equity
prices and reduced risk aversion stemming
from expanded global liquidity, foreign in-
vestors continue to sell KTB futures, thus
exerting upward pressure on market rates.
Foreign purchases of Korean bonds, which
had been slowing since October 2011, have
shown a net increase since mid-February.
Because such purchases have been con-
centrated primarily at the short end of the
yield curve and in MSBs, however, their
most likely effect will be to limit increases
in short-term rates, rather than causing
benchmark or other medium- to long-term
rates to fall.
Owing to the recent trend of foreigners
selling KTB futures, the trading range of
benchmark rates has shifted upward, but con-
sidering the pent-up demand within the bond
markets and the fact that accumulated for-
eigner-held positions are near historical
highs, such selling is unlikely to have a sig-
nificant impact on market yields.
37
Market Watcher
Exchange Rate: As uncertainties dissipate, a gradual strengthening of the
KRW is expected
Yootag Jung, Associate Researcher
[Figure 1] The KRW Strengthened as a Result of
Improved Domestic and External Conditions
[Figure 2] Liquidity Conditions in Europe's
Banking Sector Improved
1000
1050
1100
1150
1200
1250
11.7 11.9 11.11 12.1 12.310
20
30
40
50
60
KRW/USD (L) VIX (R)
(KRW) (Index)
0
20
40
60
80
100
120
11.7 11 .9 11.11 12.1 12 .3
-180
-150
-120
-90
-60
-30
0
Euro OIS Spread (L)
Euro Basis Swap (R)
(bp) (bp)LTRO 1 LTRO 2
Source: Bloomberg Source: Bloomberg
As the year opened, the USD/KRW ex-
change rate was hovering around 1,140-1,160
won, but then fell to the 1,100-1,120 range
after S&P's downgrade of the Eurozone in
mid-January, which actually helped clear
some of the uncertainty, as well as the Fed's
announcement that it would maintain
near-zero interest rates for an extended
period. The second round of LTRO, the sec-
ond round of Greek aid, and growing ex-
pectations for a US recovery helped to main-
tain the basic trend, although further down-
ward movement was limited by the ongoing
Greek crisis, fears of a global economic
slowdown, and rising oil prices. As a result,
the USD/KRW exchange rate has been hov-
ering within a 1,110-1,140 won range.
In particular, the second round of the
ECB's highly-anticipated LTRO program was
larger than expected (€529.5 billion), and
like the first round, created enough liquidity
to help ease credit market conditions and
stabilize Europe's sovereign bond markets,
while also easing concerns about the health
of the financial sector as short-term funding
costs declined. In addition, the voluntary par-
ticipation rate of private sector creditors in
Greece's debt swap was 85.8%. This further
helped to mitigate fears about debt delever-
aging or a disorderly default in the
Eurozone, thereby signalling that any imme-
diate, adverse impacts of the European crisis
on global financial markets are beginning to
wane.
38
Mar 2012 Hana Insight
[Figure 3] China's Exports Slowed While Its
Trade Deficit Expanded
[Figure 4] Tensions in Iran Fueled Oil Price
Volatility
-40
-30
-20
-10
0
10
20
30
40
50
60
11.1 11.3 11.5 11.7 11.9 11.11 12.1-40
-30
-20
-10
0
10
20
30
40
50
60
Trade Balance (L)Exports (R)Imports (R)
(bil.$) (YoY, %)
70
80
90
100
110
120
130
11.1 11.3 11.5 11.7 11.9 11.11 12.1 12.3
Dubai WTI
(USD/Barrel) NDA Act
Source: Bloomberg Source: Bloomberg
With the strains in Europe beginning to
ease, the exchange rate will likely be de-
termined mostly by the direction of the real
economy in major economies. In the US, 4Q
2011 GDP was recently revised upward from
2.8% to 3.0% and employment continues to
improve, but doubts remain about the sus-
tainability of the recovery. In Europe, the
economic downturn is accelerating, with cri-
sis-ridden countries posting two consecutive
quarters of negative growth. Even emerging
economies appear to be officially slowing. In
China, for instance, February production and
consumption numbers came in below expect-
ations, and the trade deficit soared to $31.5
billion, its highest level in 20 years, fueling
fears that the world's second-largest economy
could be headed for a severe slowdown. On
top of these fears, the standoff in Iran has
pushed up oil price volatility, adding fuel to
fears of a global economic slowdown.
Over the short term, the downtrend in the
USD/KRW exchange rate is likely to con-
tinue, particularly as the crisis in Europe sta-
bilizes on the back of the new Fiscal
Stability Treaty, waning Greek concerns, and
improved liquidity conditions. The Korean
government's clarification of its monetary
stance, as well as improvements in the trade
surplus, should also strengthen the KRW.
However, other factors could exert upward
pressure on the exchange rate, including
whether European banks raise adequate capi-
tal by the June deadline, the determination
by ISDA that Greece's debt swap was indeed
a credit event, an economic downturn in
Europe and emerging economies, and volatile
oil prices. Even if such events cause the ex-
change rate to rise temporarily, however, the
general trend should be downward, poten-
tially falling below 1,100 won some time
over the next quarter.
39
Market Watcher
Equities: A weak start in 2Q should pave the way to a stronger finish
Yonghyun Cho, Strategist, Hana Daetoo Securities
[Figure 1] Net Foreign Purchases of Korean
Equities
[Figure 2] Correlation Between Equity and Oil
Prices (2008 to Present)
-8
-6
-4
-2
0
2
4
6
8
09.1 09.7 10.1 10.7 11.1 11.7 12.1
(\tn) 6.9
4.3y = 0.0965x - 32.538
R2 = 0.7304
20
40
60
80
100
120
140
160
600 800 1000 1200 1400 1600 1800
(Oil Price ,$)
Global Equity Index
Reverse correlation above $120
Source: KRX, Hana Daetoo Securities
Source: Thomson Reuters, Hana Daetoo Securities
Note: Oil price is average of Brent, Dubai and WTI
Korea's equity market has been in an
uptrend since the start of 2012 - something
of a surprise to many, since the consensus
outlook at the end of last year expected the
market to suffer a correction and elevated
volatility sometime in 1Q, followed by a
gradual recovery through the rest of the
year.
The consensus forecast expected elevated
volatility in 1Q based on a number of fac-
tors, such as the potential S&P downgrade
of the Eurozone in January, as well as the
maturity schedule of PIIGS sovereign bonds.
These events had limited impact, however, as
S&P's downgrade of the Eurozone had appa-
rently already been priced in, while the debt
of the PIIGs was rolled over through the
ECB's LTRO operations.
US economic indicators, which had begun
to turn upward last October, continued to
improve into the new year. This positive
trend - combined with global policy support
in the form of the ECB's LTRO operations,
further quantitative easing by the BOJ, eased
reserve requirements by the PBC, as well as
hopes for QE3 by the Fed - helped the
global liquidity situation to improve rapidly,
providing a boost to global equity markets.
As the global liquidity environment im-
proved, massive foreign capital flows found
their way into Korea's equity markets. In
January, net inflows were ₩6.9 trillion, the
highest ever recorded over a monthly period,
40
Mar 2012 Hana Insight
[Figure 3] S&P500 Index vs. EPS [Figure 4] Forward EPS Growth & P/E Ratios
0
200
400
600
800
1000
1200
1400
1600
2008 2009 2010 2011 2012$0
$5
$10
$15
$20
$25
$30Quarterly EPS (R)
S&P500 (L)
(Index)
KoreaUK
FranceGermany
TaiwanSingaporeIndia
China
Indonesia
ThailandUS
Canada
Brazil
6
7
8
9
10
11
12
13
14
15
16
0 5 10 15 20 25
(P/E)
(EPS Growth)
Source: S&P, Hana Daetoo Securities Source: Bloomberg, Hana Daetsoo Securities
and foreign capital continued to flow into
Korea's markets in February as well. January
also saw the KOSPI rise above 2000 for the
first time in six months.
Any one of the following three main fac-
tors could influence the general direction of
the equity markets in 2Q. First is the geo-
political risk and oil price volatility stem-
ming from the Iranian nuclear issue. Second
is the political risk stemming from Greek's
parliamentary elections and France's presi-
dential elections. And third is the direction
of the economy and corporate earnings.
With regard to the first factor, oil price
volatility is likely to continue until tensions
in the Strait of Hormuz are resolved. This is
likely to have a negative impact not only on
already-high inflation but on equity markets
as well. As for the second factor, there re-
mains some possibility that the results of
key national elections in Europe could have
a negative influence on ongoing intra-region-
al efforts to resolve European fiscal woes.
As for the third factor, it seems likely
that the global economy and corporate earn-
ings will recover slowly in 2Q after bottom-
ing in 1Q, as previously sluggish employ-
ment and construction in the US continue to
recover, and as China's efforts to reverse
previous tightening and stimulate domestic
demand help to buffer the slowdown in its
economy.
Korea's equity market should start off
weak in 2Q but regain strength in the latter
part. After the strong rise in 1Q, not only is
a technical correction warranted, but geo-
political and political risks could also have a
negative impact. But as economic momentum
and corporate earnings are expected to recov-
er after 1Q, the equity market will also like-
ly be able to get back on the path to recov-
ery following a brief correction.