Industrial of Korea (024110 KS ) Steady net interest income & dividend growth

Banks Earnings stability stands out As a state-run bank supporting SMEs, Industrial Bank of Korea (IBK) primarily sources Company Report its funds through the issuance of Small and Medium Industry Finance (SMIF) bonds July 18, 2017 (49% of total deposits, as of end-March 2017), which are fully guaranteed by the government. The bank can issue SMIF bonds up to 20 times its paid-in capital, plus reserves (while the debenture issuance limit for regular is five times their equity capital), and enjoys an advantage in its funding structure due to its exemption (Maintain) Buy from loan-to-deposit ratio regulations. In addition, the bank is designated as a “non- classified public institution,” as its major shareholder is the government (51.8% of Target Price (12M, W) 17,500 common shares held by the Ministry of Strategy and Finance, 1.9% by Korea Development Bank, and 1.5% by the Export-Import Bank of Korea). Share Price (07/14/17, W) 14,700 Thanks to this favorable structure, IBK has seen steady growth in net interest Expected Return 19% income since 2001, except for 2012-13, when interest rates on SME loans were cut by 50bps. The bank’s funding advantages keep net interest margins (NIM) we ll supported during times of market interest rate declines. Recently, market rates NP (17F, Wbn) 1,359 have been moving higher, driving NIM improvements. More importantly, however, Consensus NP (17F, Wbn) 1,330 demand for SME loans appears to be growing strongly.

EPS Growth (17F, %) 17.2 2Q17 preview: Robust net profit of W329.2bn (+14.9% YoY, -24.6% QoQ) Market EPS Growth (17F, %) 39.4 We see IBK’s 2Q17 net profit coming in at W329.2bn, 10% above the Bloomberg P/E (17F, x) 7.1 consensus (W299.2bn) and 9.3% above the FnGuide consensus (W301.3bn). Market P/E (17F, x) 10.1 KOSPI 2,414.63 We do not expect any special items, aside from W66bn in performance incentives (which are typically paid out in the second quarter). We estimate net interest Market Cap (Wbn) 8,232 income was robust, at W1.29tr (+7.6% YoY, +3.0% QoQ), backed by: 1) loan growth Shares Outstanding (mn) 658 (+2.8% QoQ); and 2) NIM expansion (+1bp QoQ to 1.93%). We estimate SG&A Free Float (%) 44.6 expenses, including the i ncentive payout, were W598.4bn (+2.7% YoY, +18.6% Foreign Ownership (%) 18.6 QoQ), with cost-to-income ratio remaining stable, at 44.3% (-1.5%p YoY, +9.7%p Beta (12M) 0.50 QoQ). We estimate credit costs were W307.3bn (+3.3% YoY, -17.6% QoQ), 52-Week Low 11,050 representing 16bps of total credit (not annualized; flat YoY, -4bps QoQ). 52-Week High 14,750 Raise TP to W17,500; superior earnings stability and dividend appeal (%) 1M 6M 12M Reflecting stronger-than-expected loan growth, we raise our 2017-19 net profit Absolute 5.8 20.0 33.0 estimates by 1.1%, 2.6%, and 2.5%, respectively. We raise our target price to Relative 3.9 3.2 10.7 W17,500 (target P/B of 0.61x) from W16,000 (target P/B of 0.56x). We view our 140 Industrial Bank of Korea valuation as highly achievable, given our 2017-19 ROE forecasts of 7.3%-7.4%. We KOSPI 130 also believe the stock offers attractive dividends, with yields estimated at 3.9% for 120 2017 and 4.3% for 2018, based on current share prices. 110 100 90 80 7.16 11.16 3.17 7.17 Fiscal year ending 12/14 12/15 12/16 12/17F 12/18F 12/19F Net interest inc. (Wbn) 4,511 4,631 4,876 5,187 5,521 5,854 Mirae Asset Daewoo Co., Ltd. Net non-interest inc. (Wbn) 47 129 64 170 39 -11 Operating profit (Wbn) 1,388 1,500 1,533 1,851 1,938 2,078 [Banks/Credit card ] Net profit (Wbn) 1,027 1,143 1,158 1,359 1,428 1,534

Heather Kang EPS (W) 1,576 1,750 1,763 2,065 2,170 2,331 +822 -3774 -1903 EPS growth (%) 19.9 11.0 0.7 17.2 5.1 7.4 [email protected] P/E (x) 9.3 8.4 8.3 7.1 6.8 6.3

P/PPOP (x) 3.2 3.1 3.0 2.6 2.5 2.4 P/B (x) 0.62 0.56 0.54 0.51 0.48 0.45 ROE (%) 6.9 7.0 6.6 7.4 7.3 7.4

Dividend yield (%) 2.9 3.1 3.3 3.9 4.3 4.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

July 18, 2017 Industrial Bank of Korea

In deriving our target price, we applied a target P/B of 0.61x, up from 0.56x previously, after revising our sustainable ROE assumption to 7.3% from 6.8%. We accordingly raise our target price to W17,500 from W16,000. We view our valuation as highly achievable, given our 2017- 19 ROE forecasts of 7.3%-7.4%.

We forecast IBK to steadily raise its dividend payout (based on net profit attributable to controlling interests) to 28.1% in 2017, 29% in 2018, and 30.9% in 2019 (versus 25.8% in 2015 and 27.3% in 2016). As such, we expect dividend per common share to increase steadily to W580 in 2017, W630 in 2018, and W720 in 2019 (versus W450 in 2015 and W480 in 2016). Even based on our target price of W17,500, dividend yields look attractive, at 3.3% for 2017F and 3.6% for 2018F. We thus believe the shares will find strong downside protection.

Table 1. Target price calculation Sustainable ROE 7.30% Growth 2.00% Cost of equity 10.65% Cost of equity 10.65% Risk-free rate 2.20% Beta 1.30 Market risk premium 6.50% Fair P/B (x) 0.61 2017F BPS (W) 28,746 Target price (W) 17,500 Source: Mirae Asset Daewoo Research estimates

Table 2. Valuation metrics at target price of W17,500 2014 2015 2016 2017F 2018F 2019F P/B (x) 0.73 0.67 0.64 0.61 0.58 0.54 P/E (x) 11.1 10.0 9.9 8.5 8.1 7.5 ROE (%) 6.9 7.0 6.6 7.4 7.3 7.4 EPS growth (%) 19.9 11.0 0.7 17.2 5.1 7.4 Dividend yield (%) 2.5 2.6 2.7 3.3 3.6 4.1 Source: Company data, Mirae Asset Daewoo Research estimates

Figure 1. IBK: P ayout ratio and dividend per share (for Figure 2. IBK: Dividend yield (for common stock) common stock)

(%) Common shares' DPS (R) (W) (%) 45.0 Dividend payout ratio (L) 800 6.0

40.0 700 4.9 5.0 35.0 600 4.3 3.9 3.9 3.9 30.0 4.0 3.7 500 3.3 25.0 2.9 3.1 2.7 2.8 2.7 400 3.0 20.0 2.4 2.2 300 15.0 2.0 1.7 1.6 1.4 10.0 200 1.0 5.0 100 - 0.0 0 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2017F 2018F 2019F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Note: Payout ratio based on consolidated net profit attributable to controlling Note: Payout ratio based on July 17th closing price of W14,700 interests

Mirae Asset Daewoo Research 2 July 18, 2017 Industrial Bank of Korea

As a state-run bank supporting SMEs, Industrial Bank of Korea (IBK) primarily sources its funds through the issuance of Small and Medium Industry Finance (SMIF) bonds (49% of total deposits, as of end-March 2017), which are fully guaranteed by the government. The bank can issue SMIF bonds up to 20 times its paid-in capital, plus reserves (while the debenture issuance limit for regular banks is five times their equity capital), and enjoys an advantage in its funding structure, due to its exemption from loan-to-deposit ratio regulations. In addition, the bank is designated as a “non-classified public institution,” as its major shareholder is the government (51.8% of common shares held by the Ministry of Strategy and Finance, 1.9% by Korea Development Bank, and 1.5% by the Export-Import Bank of Korea). The government is obligated to cover losses under the Industrial Bank of Korea Act. As such, IBK has not been designated as one of the domestic systemically important banks (D-SIBs), which are required to set aside additional capital.

IBK has been securing steady net interest margin (NIM), even during the interest rate downtrend. With 79.5% (as of end-March 2017) of the bank's won-denominated SMIF bonds maturing in one year, market rate declines are swiftly reflected into IBK's funding rates, helping to stabilize NIM.

Thanks to this favorable structure, IBK has seen steady growth in net interest income since 2001, except for 2012-13, when interest rates on SME loans were cut by 50bps. The bank’s funding advantages keep net interest margins (NIM) well supported during times of market interest rate declines. Recently, market rates have been moving higher, driving NIM improvements. More importantly, however, demand for SME loans appears to be growing strongly. We expect net interest income growth to continue into 2019.

Table 1. IBK: 2Q17 preview (Wbn) YoY chg. QoQ chg. 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17F (%, ppt) (%, ppt) Net interest income 1,182.6 1,199.9 1,250.8 1,242.9 1,253.5 1,290.6 7.6 3.0 Net commission income 95.2 95.9 90.8 93.5 92.1 92.6 -3.5 0.5 Net other income 20.9 -23.7 -83.5 -224.8 109.6 -33.1 39.5 -130.2 Total net operating income 1,298.8 1,272.0 1,258.1 1,111.6 1,455.2 1,350.0 6.1 -7.2 SG&A expenses 468.8 582.6 542.5 560.7 504.4 598.4 2.7 18.6 PPOP 830.0 689.4 715.7 550.9 950.8 751.6 9.0 -20.9 Provisions 348.7 297.4 335.2 272.1 372.9 307.3 3.3 -17.6 Operating profit 481.3 392.0 380.5 278.8 577.9 444.3 13.3 -23.1 Non -operating income -0.1 -6.7 -8.4 -0.3 -5.9 -6.0 -10.8 1.3 Pretax profit 481.2 385.3 372.1 278.6 572.0 438.3 13.8 -23.4 Net profit 376.7 286.6 281.0 213.2 436.7 329.2 14.9 -24.6 Total assets 247,069 249,778 252,888 256,851 257,491 263,103 5.3 2.2 Total loans & receivables 185,933 190,627 192,527 193,044 197,143 201,227 5.6 2.1 Won -denominated loans ( bank -level ) 165,888 170,755 173,578 173,247 176,457 181,398 6.2 2.8 Total credit 178,950 183,848 185,883 186,449 189,234 194,533 5.8 2.8 Total liabilities 91,024 95,192 95,516 103,984 101,296 104,335 9.6 3.0 Total deposits 17,435 17,931 18,344 18,047 18,400 18,416 2.7 0.1 (%) NIM (bank) 1.91 1.91 1.90 1.91 1.92 1.93 0.02 0.01 Cost -to -income ratio 36.1 45.8 43.1 50.4 34.7 44.3 -1.5 9.7 NPL (sub -standard & below) ratio 1.43 1.35 1.42 1.36 1.48 1.41 0.06 -0.07 NPL coverage ratio 166.7 171.2 168.4 167.8 156.4 156.4 -14.8 0.0 RoAE 0.15 0.12 0.11 0.08 0.17 0.13 0.01 -0.04 RoAA 2.18 1.63 1.56 1.18 2.41 1.80 0.17 -0.61 Credit cost s (to total credit) 0.19 0.16 0.18 0.15 0.20 0.16 0.00 -0.04 Total CAR 12.25 12.54 12.70 13.12 13.34 13.1 0.53 -0.27 Tier 1 ratio 9.38 9.45 9.63 10.57 11.01 10.79 1.34 -0.22 Note: ROA, ROE, credit cost data are not annualized Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 July 18, 2017 Industrial Bank of Korea

Table 2. IBK: Earnings revision (Wbn) Revised Previous Change (%, %p)

2017F 2018F 2019F 2017F 2018F 2019F 2017F 2018F 2019F Net interest income 5,187 5,521 5,854 5,146 5,455 5,790 0.8 1.2 1.1 Net non-interest income 170 39 -11 163 62 6 4.5 -36.5 -271.6 Total net operating income 5,358 5,560 5,843 5,309 5,517 5,796 0.9 0.8 0.8 SG&A expenses 2,219 2,285 2,354 2,220 2,287 2,355 0.0 0.0 0.0 PPOP 3,139 3,275 3,489 3,089 3,230 3,441 1.6 1.4 1.4 Provisions 1,287 1,336 1,410 1,258 1,339 1,412 2.3 -0.2 -0.1 Operating profit 1,851 1,938 2,078 1,831 1,891 2,029 1.1 2.5 2.5 Non-operating income -55 -46 -45 -55 -46 -45 n.a. n.a. n.a. Pretax profit 1,797 1,893 2,033 1,776 1,845 1,983 1.1 2.6 2.5 Net profit 1,359 1,428 1,534 1,343 1,392 1,496 1.1 2.6 2.5 Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 4 July 18, 2017 Industrial Bank of Korea

Figure 3. IBK: Outstanding balance of SMIF bonds and additional room for SMIF bond issuance , as of end -1Q17

Source: Company data, Mirae Asset Daewoo Research

Figure 5. IBK: W on -denominated SMIF bonds by maturity Figure 4. IBK: Deposit breakdown (1Q17) (1Q17)

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Note: Based on average numbers on the balance sheet

Figure 7. IBK: Net interest income and net commission Figure 6. IBK: Net interest income is steadily growing income trends

(Wtr) (Wbn) 6.0 7,000 Net interest income 5.5 Net fee & commission income 6,000 5.0 4.5 5,000 4.0 4,000 3.5

3.0 3,000

2.5 2,000 2.0 1,000 1.5 1.0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2017F 2018F 2019F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 July 18, 2017 Industrial Bank of Korea

Figure 8. IBK: NIM trend Figure 9. IBK: Won-denominated debt growth (YoY)

(%) (%) 2.90 25.0 22.7 2.70 20.0 19.2 2.50 14.9 15.5 13.1 2.30 15.0 12.9

2.10 9.7 10.0 8.4 8.0 7.6 6.8 6.9 1.90 5.6 6.2 5.9 5.9 5.0 4.2 1.70

1.50 0.0 2010 2011 2012 2013 2014 2015 1Q16 2Q16 3Q16 4Q16 1Q17 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2018F 2019F 2Q17F 3Q17F 4Q17F 2017F 2018F 2019F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 10. IBK: SG&A trend Figure 11. IBK: Cost-to-income ratio

(Wbn) (%) 2,500 50.0 46.7 45.0 44.1 2,000 41.4 40.0 1,500 40.3 35.0 1,000 30.0 28.9 500 25.0

0 20.0 2000 2003 2006 2009 2012 2015 2018F 2000 2003 2006 2009 2012 2015 2018F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Asset quality is important; if the government announces SME stimulus policy, IBK would benefit

As of end-1Q17, IBK’s NPL ratio increased 0.13%p YoY and 0.12%p QoQ to 1.48%, and its NPL coverage ratio deteriorated modestly to 156.4% (-10.3%p YoY, -11.4%p QoQ). Delinquency ratio declined by 0.11%p YoY, but climbed by 0.1%p, reaching 0.56%. New NPL formation came in at W788bn in 1Q17 (+50.9% YoY, -10.7% QoQ), while the ratio of new NPL formation to total credit stood at 42bps (non-annualized; +12bps YoY, -6bps QoQ). There was a one-off factor - the classification of loans to Moneual as NPLs. However, even excluding this factor, new NPL formation increased YoY to around W700bn in 1Q17.

In contrast, other major banks (financial holding companies) have seen continued improvement in their asset quality data (e.g. NPL ratio and delinquency ratio) to all-time-low levels, backed by declining loan exposure to the cyclical sector, increasing loans to healthy customers, asset clean-up efforts (including write-offs/sales of its NPLs), continued low interest rates, and decreasing new NPL formation. For IBK and regional banks with heavy loan exposure to SMEs, we think asset quality trends will require close monitoring, given that current economic conditions could add to the risk of loan defaults/delinquencies among SMEs.

Mirae Asset Daewoo Research 6 July 18, 2017 Industrial Bank of Korea

If the recent improvement in economic conditions begins to positively impact SMEs and the government implements new SME support policies, IBK should see greater downside to credit costs, thanks to improving asset quality and decreasing new NPL formation. Given that IBK shares have so far underperformed those of peers, due mainly to relatively high levels of new NPL formation and credit cost ratios, we believe any improvement in asset quality data would help drive up the shares.

Table 3. NPL ratio trend of banks (financial holding companies) (%) 2009 2010 2011 2012 2013 2014 2015 2016 1Q17 SFG 1.30 1.43 1.25 1.34 1.26 1.15 0.87 0.86 0.74 KBFG 1.25 1.88 1.56 1.49 1.79 1.38 1.18 0.96 0.86 HFG 1.15 1.61 1.12 1.33 1.48 1.35 1.23 0.92 0.89 Woori Bank ( previously 1.69 3.33 1.96 1.77 2.81 2.12 1.48 0.99 0.87 Woori F inancial Group ) IBK 1.20 1.83 1.48 1.39 1.38 1.40 1.31 1.36 1.48 BNKFG 1.09 1.07 0.97 1.20 1.30 1.42 1.30 0.97 1.03 DGBFG 1.40 1.43 1.14 1.04 1.03 1.15 1.29 1.20 1.12 JBFG 0.86 1.13 0.96 1.38 2.25 1.58 1.27 1.16 1.04 Average 1.24 1.71 1.31 1.37 1.66 1.44 1.25 1.05 1.00 Source: Company data, Mirae Asset Daewoo Research

Table 4. Banks’ delinquency ratio trend (%) 2009 2010 2011 2012 2013 2014 2015 2016 1Q17 Shinhan 0.41 0.48 0.60 0.61 0.39 0.31 0.33 0.36 0.28 KB Kookmin 0.63 1.00 1.00 0.97 0.77 0.51 0.40 0.44 0.35 Woori 0.62 0.99 0.82 1.20 1.14 0.91 0.82 0.46 0.45 Former Hana 0.51 0.54 0.48 0.48 0.39 0.45 n.a. n.a. n.a. KEB Hana 0.50 0.47 0.59 0.62 0.47 0.44 0.53 0.39 0.41 IBK 0.50 0.67 0.70 0.63 0.50 0.45 0.45 0.70 0.56 Busan 0.55 0.53 0.59 0.55 0.55 0.51 0.55 0.58 0.48 DGB 1.07 0.47 0.92 0.70 0.57 0.73 0.85 0.68 0.55 Gyeongnam 0.57 1.10 1.33 0.77 0.55 0.94 0.60 0.59 0.55 JB 0.74 0.65 0.61 1.16 1.38 1.14 1.35 1.21 1.08 Gwangju 0.50 1.33 0.60 0.82 0.82 0.60 0.81 0.59 0.59 Average 0.60 0.75 0.75 0.77 0.68 0.64 0.72 0.60 0.53 Domestic average 0.63 0.77 0.77 0.88 0.76 0.64 0.58 0.47 0.51 Source: Company data, FSS, Mirae Asset Daewoo Research Note: For KEB Hana Bank, pre-merger KEB’s data were used

Mirae Asset Daewoo Research 7 July 18, 2017 Industrial Bank of Korea

Figure 12. IBK: Bank NPL ratio trend Figure 13. IBK: Bank delinquency ratio trend

(%) (%) 3.50 3.0 2.82 3.00 2.66 2.5 2.50 2.0 2.00 1.83 1.5 1.48 1.50

1.31 1.0 1.00 1.20 0.56 0.5 0.50 0.50 0.69 0.46 0.46 0.00 0.0 2001 2004 2007 2010 2013 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 14. IBK: New NPL formation and % of total credit Figure 15. IBK: Credit costs and % of total credit

(Wbn) New NPL formation (L) (Wbn) 3,500 % of total credit (R) 1,900 Credit cost Credit cost, % of total credit 2.10% 1.70% 1,700 3,000 1.90% 1.50% 1.70% 1,500 2,500 1.30% 1.50% 1,300 2,000 1.30% 1.10% 1,100 1,500 1.10% 900 0.90% 0.90% 1,000 0.70% 0.70% 700

500 0.50% 500 0.50% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1Q17 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1Q17

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Note: 1Q17 new NPL formation was based on annualized figures; NPL as % of total Note: 1Q17 new NPL formation was based on annualized figures; NPL as % of total credit has been calculated based on average balance of total credit credit has been calculated based on average balance of total credit

Mirae Asset Daewoo Research 8 July 18, 2017 Industrial Bank of Korea

Table 5. IBK: Quarterly and annual earnings (Wbn) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17F 3Q17F 4Q17F 2014 2015 2016 2017F 2018F 2019F Net interest income 1,183 1,200 1,251 1,243 1,253 1,291 1,315 1,328 4,511 4,631 4,876 5,187 5,521 5,854 Net fee income 95 96 91 93 92 93 93 93 346 406 375 371 371 366 Net other income 21 -24 -83 -225 110 -33 -71 -206 -299 -277 -311 -200 -332 -377 Total net operating income 1,299 1,272 1,258 1,112 1,455 1,350 1,337 1,216 4,558 4,759 4,941 5,358 5,560 5,843 SG&A expenses 469 583 542 561 504 598 539 577 2,005 2,097 2,155 2,219 2,285 2,354 PPOP 830 689 716 551 951 752 798 638 2,552 2,663 2,786 3,139 3,275 3,489 Provisions 349 297 335 272 373 307 333 274 1,164 1,163 1,253 1,287 1,336 1,410 Operating profit 481 392 380 279 578 444 465 364 1,388 1,500 1,533 1,851 1,938 2,078 Non -operating income -0 -7 -8 -0 -6 -6 -14 -30 -45 -30 -15 -55 -46 -45 Pretax profit 481 385 372 279 572 438 452 335 1,343 1,469 1,517 1,797 1,893 2,033 Net profit 377 287 281 213 437 329 341 252 1,027 1,143 1,158 1,359 1,428 1,534 Source: Company data, Mirae Asset Daewoo Research

Table 6. Banking/card stocks: 2017 monthly institutional and foreign net buying (selling) (Wbn) Total of SFG KBFG HFG Woori IBK BNKFG DGBFG JBFG Kwangju Total nine banks Card For. Inst. For. Inst. For. Inst. For. Inst. For. Inst. For. Inst. For. Inst. For. Inst. For. Inst. For. Inst. For. Inst. For. Inst. Jan. 36 -36 124 -9 98 -39 46 -21 60 -78 -3 -6 7 0 7 -8 6 -1 380 -198 8 -12 388 -209 Feb. 15 11 -3 44 36 13 4 20 4 -41 9 -14 0 15 3 -1 4 0 73 47 5 3 78 50 Mar. 56 -82 276 -183 157 -127 14 -16 -6 -58 16 2 14 -4 -9 21 2 2 520 -446 7 -20 527 -466 Apr. 95 -71 -5 49 54 -13 69 10 4 0 27 -6 3 8 4 -1 0 0 251 -24 1 -1 252 -25 May 55 17 120 -73 20 2 27 -22 -2 -9 16 -2 38 -44 8 -6 1 -2 283 -139 15 -13 298 -153 Jun. 74 -62 212 -150 107 -49 33 128 66 -4 26 -3 3 -13 2 -7 0 -3 524 -162 20 -38 544 -201 Jul. 21 -24 383 15 -3 18 22 17 -14 22 0 0 7 -4 1 4 1 -2 417 45 0 -5 417 40 Total 352 -247 1,108 -307 469 -195 214 115 112 -167 92 -30 73 -42 16 2 12 -7 2,448 -877 56 -87 2,504 -964 Note: Based on July 14 th data Source: KRX, QuantiWise, Mirae Asset Daewoo Research

Table 7. Banking/card stocks: Share performances and changes in foreign ownership Samsung Company SFG KBFG HFG Woori IBK BNKFG DGBFG JBFG Kwangju Card Absolute 1W 0.4 1.1 5.3 -0.3 3.9 0.0 3.5 2.6 -0.8 -0.4 performance 1M -3.2 2.9 11.3 8.5 5.8 0.0 -0.4 6.1 -2.2 -4.3 (%) 3M 6.2 18.8 29.6 33.3 21.0 19.5 7.3 18.3 20.2 1.3 6M 9.6 30.7 47.8 47.6 20.0 24.4 24.2 19.6 26.0 -0.3 1Y 28.4 71.8 103.8 87.3 33.0 26.9 35.3 18.5 51.4 -10.7 YTD 8.5 33.9 53.3 45.9 15.8 25.0 20.8 17.3 21.3 -1.9 Performance 1W -1.1 -0.4 3.8 -1.7 2.4 -1.5 2.1 1.1 -2.2 -1.8 relative to 1M -4.9 1.1 9.5 6.7 4.0 -1.8 -2.2 4.3 -4.0 -6.1 KOSPI 3M -6.9 5.7 16.5 20.2 7.9 6.4 -5.8 5.2 7.1 -11.8 (%p) 6M -6.7 14.4 31.6 31.4 3.7 8.2 7.9 3.3 9.7 -16.5 1Y 8.2 51.6 83.6 67.1 12.8 6.7 15.1 -1.7 31.2 -30.9 YTD -10.7 14.7 34.1 26.7 -3.4 5.8 1.6 -1.9 2.1 -21.1 Net increase 1W 0.0 1.4 0.1 0.1 -0.1 -0.1 0.4 0.0 0.0 0.0 in foreign 1M 0.0 2.0 0.2 1.2 0.1 0.2 0.3 0.1 0.0 0.1 ownership 3M 0.5 2.9 0.7 0.7 0.7 1.1 2.4 1.1 0.2 0.7 (%p) 6M 1.5 4.4 3.1 1.6 0.7 2.9 3.3 0.9 1.1 1.0 1Y 3.9 0.8 7.9 1.6 0.8 3.4 2.0 7.4 5.6 -2.9 YTD 1.6 5.1 4.1 2.2 1.6 2.8 3.7 1.8 2.2 1.2 Note: Based on July 14th data Source: KRX, QuantiWise, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 9 July 18, 2017 Industrial Bank of Korea

Industrial Bank of Korea (024110 KS/Buy/TP: W17,500)

Comprehensive Income Statement (Summarized ) Statement of Financial Condition (Summarized) Year-end 12 (Wbn) 12/16 12/17F 12/18F 12/19F Year-end 12 (Wbn) 12/16 12/17F 12/18F 12/19F Interest income 7,772 7,971 8,470 8,945 Cash & dues 11,699 12,108 12,673 13,200 Interest expense 2,896 2,784 2,949 3,092 Securities 39,970 42,282 44,257 46,096 Net interest income 4,876 5,187 5,521 5,854 Net loans and receivables 193,044 205,539 217,854 230,901 Net fees and commissions 375 371 371 366 Tangible assets 1,909 1,898 1,886 1,875 Net other non-interest income -311 -200 -332 -377 Other assets 10,229 7,050 7,007 6,964 Total net operating income 4,941 5,358 5,560 5,843 Total assets 256,851 268,877 283,677 299,036 G&A expenses 2,155 2,219 2,285 2,354 Deposits 103,984 106,845 112,836 119,162 PPOP 2,786 3,139 3,275 3,489 Borrowings 26,670 29,000 30,355 31,616 Total provision expenses 1,253 1,287 1,336 1,410 Debentures 90,863 95,599 100,064 104,222 Operating profit 1,533 1,851 1,938 2,078 Other liabilities 17,286 18,421 20,358 22,430 Net non-operating income -15 -55 -46 -45 Total liabilities 238,804 249,865 263,612 277,430 Income before income taxes 1,517 1,797 1,893 2,033 Capital stock 3,290 3,290 3,290 3,290 Income tax expense 353 431 458 492 Hybrid securities 1,398 1,698 1,698 1,698 Net profit 1,165 1,366 1,435 1,541 Capital surplus 554 555 555 555 Net profit (ex. minority interest) 1,158 1,359 1,428 1,534 Retained earnings 12,041 12,761 13,815 15,356 Normalized net profit 1,202 1,359 1,428 1,534 Capital adjustments 0 0 0 0 Other comprehensive income 667 610 610 610 Core income 5,252 5,558 5,892 6,220 Non-controlling interests 97 98 98 98 Core PPOP 3,097 3,339 3,606 3,866 Total shareholders' equity 18,047 19,012 20,065 21,606

DuPont analysis (%) Key ratios (%) Interest income 3.13 3.03 3.07 3.07 Growth (YoY) Interest expense 1.17 1.06 1.07 1.06 KRW loan growth (Bank) 6.2 6.9 5.9 5.9 Net interest income 1.96 1.97 2.00 2.01 Net loans & receivables growth 5.7 6.5 6.0 6.0 Net commission income 0.15 0.14 0.13 0.13 Deposit growth 9.1 2.8 5.6 5.6 Net other non-interest income -0.13 -0.08 -0.12 -0.13 Shareholders' equity growth 4.4 5.3 5.5 7.7 Total net operating profit 1.99 2.04 2.01 2.01 Total asset growth 7.1 4.7 5.5 5.4 G&A expenses 0.87 0.84 0.83 0.81 Net interest income growth 5.3 6.4 6.4 6.0 PPOP 1.12 1.19 1.19 1.20 Net fee income growth -7.4 -1.2 -0.1 -1.1 Total provision expenses 0.51 0.49 0.48 0.48 PPOP growth 4.6 12.7 4.3 6.5 Net non-operating income -0.01 -0.02 -0.02 -0.02 Operating profit growth 2.2 20.8 4.7 7.2 Income before income taxes 0.61 0.68 0.69 0.70 Net profit growth 1.3 17.4 5.1 7.4 Income tax expense 0.14 0.16 0.17 0.17 Profitability Net profit (non-controlling) 0.00 0.00 0.00 0.00 Net interest spread (Bank) 1.86 1.88 1.88 1.88 ROA 0.48 0.52 0.52 0.53 Net interest margin (Bank) 1.91 1.93 1.93 1.93 Leverage (x) 14.1 14.3 14.2 14.0 PPOP margin 1.1 1.2 1.2 1.2 ROE 6.59 7.37 7.34 7.40 ROA 0.5 0.5 0.5 0.5 Asset quality (%) ROE 6.6 7.4 7.3 7.4 NPL ratio 1.36 1.38 1.34 1.30 Liquidity Broad NPL ratio 2.72 2.70 2.61 2.52 KRW LDR (excl. CDs) (Bank) 0.0 0.0 0.0 0.0 NPL coverage ratio 167.8 162.5 168.5 169.5 Loans to assets 75.2 76.4 76.8 77.2 Reserves to total credits 2.3 2.2 2.3 2.3 Capital adequacy Credit cost (% of total loans) 0.65 0.63 0.61 0.61 Total CAR 13.1 13.4 13.9 14.0 Credit cost (% of total credit) 0.67 0.65 0.64 0.63 Tier 1 CAR 10.6 11.1 11.7 11.8 Per share items (KRW) Tier 2 CAR 2.6 2.3 2.2 2.2 EPS (reported) 1,763 2,065 2,170 2,331 Operating efficiency EPS (normalized) 1,830 2,065 2,170 2,331 Cost to income 43.6 41.4 41.1 40.3 BVPS 27,282 28,746 30,347 32,689 Cost to assets 0.8 0.8 0.8 0.8 DPS (common share) 480 580 630 720 Dividend PPOP/ share 4,243 4,771 4,977 5,302 Payout ratio 27.3 28.1 29.0 30.9 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 10 July 18, 2017 Industrial Bank of Korea

APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) Industrial Bank of Korea Industrial Bank of Korea (024110) 07/18/2017 Buy 17,500 25,000 04/17/2017 Buy 16,000 20,000 02/06/2017 Buy 17,000 No Coverage 15,000 01/25/2016 Buy 17,300 10,000 11/25/2015 Buy 20,000 07/09/2015 Buy 19,500 5,000

0 Jul 15 Jul 16 Jul 17

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ─), Target price (▬), Not covered ( ■), Buy ( ▲), Trading Buy ( ■), Hold ( ●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution Buy Trading Buy Hold Sell 69.67% 17.06% 13.27% 0.00% * Based on recommendations in the last 12-months (as of June 30, 2017)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the . Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the . In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Mirae Asset Daewoo and its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of

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the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

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Mirae Asset Daewoo Research 12 July 18, 2017 Industrial Bank of Korea

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