BIS Capital Ratios, September, 2007

Bank BIS capital ratios at end-September, 2007, averaged 12.71%, down modestly from 12.75% at end-2006. A 14.02% (KRW130.3 trillion) increase in risk-weighted assets led by loan growth of small- and medium-sized companies more than offset the 13.6% (KRW16.1 trillion) increase in bank capital and lowered the overall BIS ratio for the period.

With bank net income totaling KRW13.2 trillion for the first nine months of the year, tier-1 capital rose 15.81% (KRW13.4 trillion) and tier-2 capital 8.01% (KRW2.7 trillion). Of the 13 commercial banks, the capital ratio rose for 8 banks but fell for 5 others during the January-September period.

Basel II Implementation in 2008

Implementation of Basel II is set to begin in 2008 as scheduled for domestic banks. Of the 18 domestic banks, Kookmin has received regulatory approval for the use of internal-ratings-based (IRB) approach; the 17 others are to begin with the standardized approach. Both the Industrial Bank of Korea and the Korea Development Bank are also working on regulatory approval for the use of IRB approach in 2009.

As the implementation of Basel II progresses, the BIS capital ratios of domestic banks are expected to initially fall by one to two percentage points from the pre- Basel II ratios, a relatively minor drop given domestic banks’ robust accumulated net profits (estimated at KRW15.8 trillion for 2007) and the ample capacity to boost both tier-1 and tier-2 capital. Moreover, with a reduced risk weight (from 100% to 75%) for loans less than KRW1 billion to small- and medium-sized companies as well as other downward risk weight fine-tuning provided under the Basel II-based capital rules, domestic banks are not expected to see any material changes in their capital base. For the six regional commercial banks, the drop under Basel II is expected to be even smaller.

With most domestic banks aiming for the adoption of advanced IRB currently set to be introduced in 2009, the implementation of Basel II is expected to serve as a major catalyst for more rigorous and effective risk management by domestic banks going forward.

* Please refer to the attached PDF below.