RATINGS RATIONALE

"This change in outlook reflects improvements in the bank's asset quality since last year," says Hyun Hee Park, a Moody's Analyst.

Suhyup's nonperforming loan (NPL) ratio -- as measured by the proportion of credits classified as substandard and below, and compared with total credits -- improved to 2.3% in June 2012 from a high of 4.6% in September 2010.

Factors behind the improvement in Suhyup's credit quality include reductions in its construction-related exposures. The bank has substantially cut its loan exposures to project financing and the construction industry; these were 5.7% of total loans at June 2012, down from 9.4% at end-2010.

Accompanying the improvement in asset quality, profitability -- as measured by annualized returns on assets -- improved to 0.38% for 1H 2012 from 0.22% in 2010 as overall credit costs have declined substantially.

Despite the improvements in Suhyup's financial metrics, it continues to have a relatively weak franchise and shows intrinsic loan book vulnerabilities. As a result, its stand-alone credit assessment of ba3 is the lowest of all the banks in Korea. There is a risk that Korea's weakening operating environment could result in deteriorated credit quality and increased loan loss provisions over the next quarters.

Suhyup has been trying to replace its exposures to the construction sector with those to less risky niche markets, such as lending to churches, and to small offices and home offices, a segment known as SOHO. But it is exposed to concentrations; for example, its lending to churches now makes up 11.3% of total lending.

Suhyup is partly a policy bank focused on Korea's fisheries and broader maritime industries. It enjoys a close relationship with the Ministry of Food, Agriculture, Forestry and Fisheries. In a legal sense, it is a unit of the National Federation of Fisheries Cooperatives (NFFC), and is governed by the NFFC Law.

While this law does not contain the solvency maintenance language that is seen in the laws governing many other Korean policy banks, it does explicitly allow the government to inject capital into the bank and to fully guarantee the fishery finance bonds that fund Suhyup's policy lending.

Accordingly, Moody's assumes a very high probability of government support for the bank and this results in a seven-notch uplift over its stand-alone credit assessment to A2.

One challenge facing the bank is that the bulk of its capital consists of preference shares injected by the Korea Deposit Insurance Corporation, a unit of the government, when the bank received systemic support in 2001. Even though these shares have no current servicing cost and no fixed repayment schedule, they are technically ineligible for treatment as Tier I capital under Basel III. On 27 September, 2012, the Financial Services Commission (FSC) allowed Suhyup to delay implementation of Basel III to 2015.

Going forward, Suhyup plans to meet Basel III capitalization standards by end-2014 through:

i) Reorganizing the NFFC -- which is currently under a non-shareholding organization structure -- into a shareholding structure, under which Suhyup would be incorporated as a subsidiary

ii) Converting the Korea Deposit Insurance Corporation-owned preference shares of KRW1.158 trillion into common equity, or transferring the shares to NFFC, and then having NFFC directly inject capital into Suhyup

iii) Receiving capital injections from NFFC and member cooperatives and employees

At the current rating level, Moody's does not view Suhyup's unusual capital structure as a negative rating factor. Nonetheless, if the bank fails to find a solution that allows it to meet Basel III requirements by the end of its grace period, this development could become a negative credit factor if it negatively impacts its ability to grow, or market confidence is affected.

Moody's does not see much chance for the bank's long-term deposit or debt ratings to be upgraded in the foreseeable future because its A2 long-term senior debt or deposit ratings already incorporate a seven-notch rating uplift due to our assumption of government support.

Moody's would consider downgrading the ratings if we see signs that Suhyup's policy role and special relationship with the government are weakening.

Moody's would also consider downgrading the ratings if (1) the bank makes no progress in rationalizing its capital structure to meet Basel III requirements by end-2014, and this situation is negatively affecting its franchise or market confidence in it, (2) Suhyup's core Tier 1 ratio drops below 4.5%, or (3) its NPL ratio on a consolidated basis rises above 4%.

The principal methodology used in this rating was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Suhyup Bank -- one of five specialized banks in Korea charged with public policy functions -- provides financing and support for the development of Korea's fisheries and maritime industries. The National Federation of Fisheries Cooperatives (NFFC), as a sole legal entity, runs three business units: Suhyup Bank (or the credit business unit), the economy business (EBU), and the guidance business (GBU). However, the bank separates its management, operations, and assets and liabilities from the other business units of NFFC, as Articles 138-5 and 164 of the Fisheries Cooperative Law and charter for NFFC -- require it to do so. The bank, established in 1962, had assets of KRW23 trillion (about USD21 billion) as of 30 June, 2012.

REGULATORY DISCLOSURES

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Hyun Hee Park Analyst Financial Institutions Group Moody'sInvestors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Stephen Long MD - Financial Institutions Financial Institutions Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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