MORGAN STANLEY RESEARCH ASIA/PACIFIC

Morgan Stanley & Co. International Joon Seok plc, Seoul Branch+ [email protected] +82 2 399 4934 Gil Woo Lee [email protected] +82 2 399 4935

October 22, 2010

Stock Rating Busan Bank Overweight

Industry View BSB Shows There Are Bright Attractive Spots for Korean Banks Key Ratios and Statistics Reuters: 005280.KS Bloomberg: 005280 KS S. Korea Financial Services What's Changed Price target W18,000 Price Target W15,500 to W18,000 Up/downside to price target (%) 25 10E/11E/12E MW EPS Up 10%/13%/18% Shr price, close (Oct 21, 2010) W14,400 52-Week Range W15,100-10,000 Sh out, dil, curr (mn) 187

We have raised our price target from W15,500 to Mkt cap, curr (bn) W2,688 W18,000 and we maintain our OW rating: Busan EV, curr (bn) W2,688 Bank (BSB) has been our preferred small-cap pick but it Avg daily trading value (bn) W11

has outperformed even its larger peers in FY10. We Fiscal Year ending 12/09 12/10e 12/11e 12/12e think BSB deserves a premium, at least 1.2x 2011E P/B. ModelWare EPS (W) 1,313 1,965 2,188 2,458 Prior ModelWare EPS (W) - 1,779 1,939 2,087 BSB posted strong 3Q10 results; NP hit W103bn, a Consensus EPS (W)§ 1,366 1,860 2,006 2,226 historical record-high: The strong results mainly came ModelWare net inc (W bn) 245 367 408 459 from 1) notable loan growth to offset margin P/E 10.6 7.3 6.6 5.9 deterioration, 2) bigger net non-interest income along P/BV 1.2 1.1 0.9 0.8 with reduced losses from NPL sales, 3) minimal impact Div yld (%) 1.1 1.4 4.2 4.9 Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare from tougher PF guideline, and 4) one-off gain on framework (please see explanation later in this note). § = Consensus data is provided by FactSet Estimates. disposal of equity method investments. e = Morgan Stanley Research estimates

Strong top line and resilient asset quality: While BSB enjoyed stronger net operating revenues, low level of provisioning supported bottom-line profit. The impact from strengthened PF guideline was very minimal (W4.2bn) for the bank. Gross NPL formation sharply decreased and NPL ratio continued to fall.

FHC conversion right on track: BSB is supposed to form a financial holding company (FHC) in March 2011. We believe FHC conversion would bring many advantages to the bank; 1) improved M&A capability, 2) revenue diversification. Morgan Stanley does and seeks to do business with A good pointer for Korean banks: As the regional companies covered in Morgan Stanley Research. As economy recovers, BSB could achieve greater loan a result, investors should be aware that the firm may growth and stabilizing asset quality, especially in the have a conflict of interest that could affect the SME segment. We have asserted that quality SMEs can objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a be a potential driver for growth, and BSB’s results help single factor in making their investment decision. to support this argument. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. MORGAN STANLEY RESEARCH October 22, 2010 Busan Bank

Busan Bank: Financial Summary

Income Statement Balance Sheet (Year to Dec 31, Wbn) 2009 2010E 2011E 2012E (Year to Dec 31, Wbn) 2009 2010E 2011E Interest income 1,683 1,626 1,751 1,943 Total assets 30,477 34,587 37,400 Interbank 19 14 16 17 Cash & due from banks 1,230 1,563 1,686 Securities 266 266 282 312 Securities 5,768 5,964 6,521 Loans 1,393 1,338 1,443 1,604 Net loans 20,199 21,827 23,587 Others 5 8 10 10 (Loan loss reserve) 316 364 417 Interest expense 805 721 784 878 Loans in won 17,843 19,827 21,588 Deposits 485 481 551 638 Credit card accounts 359 403 419 Borrowings 146 94 92 98 Loans in FC 1,380 1,497 1,528 Debentures 167 141 136 136 Fixed assets 363 377 343 Others 7 6 6 7 Other assets 2,918 4,855 5,263 Net interest income 878 905 966 1,065 Interest Earnings Assets (Average) 26,541 28,054 30,579 Net commission income 83 82 83 80 Net other non-interest income -95 1 4 -2 Liabilities 28,358 32,110 34,547 Net non-interest income -11 83 87 78 Deposits 18,511 20,749 22,844 Deposits in won 15,705 17,693 19,683 Total operating income 867 987 1,053 1,143 Deposits in FC 162 184 199 Operating expenses 388 391 404 423 Certificates of deposit 2,643 1,569 1,633 Other deposit 0 1,303 1,329 Pre-Provisioning Operating Income 478 597 649 720 Borrowings 3,745 3,516 3,586 Provision for loan losses 161 127 119 123 Debentures 2,646 2,602 2,551 Other liabilities 3,456 5,243 5,566 Operating Income 317 470 530 597 Non-operating items 1 14 9 8 Interest Bearing Liab. (Average) 24,762 25,884 27,924

Ordinary Income 318 484 539 605 Shareholders' equity 2,120 2,477 2,853 Pre-tax Income 318 484 539 605 Paid-in capital 933 933 933 Income tax 73 117 130 146 Capital surplus 0 0 0 Retained earnings 1,157 1,493 1,864 Net Income 245 367 408 459 Capital adjustments 29 51 55

Valuation Key Operating Indicators (Year to Dec 31, %, X, KRW, Wbn) 2009 2010E 2011E 2012E 2009 2010E 2011E Preprovisiong income 478 597 649 720 Profitability ratio (%) Net income 245 367 408 459 Preprovisioning profit margin 55.2% 60.4% 61.6% Net interest margin 3.31% 3.23% 3.16% EPS (won) 1,313 1,965 2,188 2,458 Net interest spread 3.08% 3.02% 2.92% EPS growth (%) -30.0% 49.7% 11.3% 12.3% Non-interest income/total income -1.3% 8.4% 8.2%

P / Preprovisioning profits (x) 5.6 4.5 4.1 3.7 Asset quality (%) P/E (x) 11.0 7.3 6.6 5.9 Net loan growth 4.0% 8.2% 8.2% LLR / total credit 1.55% 1.65% 1.75% BPS (won) 11,354 13,271 15,280 17,161 NPL ratio 1.09% 1.07% 0.98% P/BV (x) 1.27 1.09 0.94 0.84 Coverage ratio on NPLs 141.8% 152.6% 176.2%

ROAA (%) 0.83% 1.11% 1.13% 1.17% Efficiency (%) ROAE (%) 12.59% 15.93% 15.41% 15.36% Loan / depositis 115.1% 108.0% 106.1% Cost / income 44.8% 39.6% 38.4% DPS (won) 160 200 600 700 Yield (%) 1.11% 1.39% 4.17% 4.86% Stability (%) Equity / assets 6.6% 7.0% 7.4% Period-end common shares (mn) 187 187 187 187 Tier 1 ratio 10.4% 11.2% 11.8% Market Cap 2,688 2,688 2,688 2,688 Capital adequacy ratio 14.7% 15.6% 15.9% E= Morgan Stanley Research Estimates Source: Company data, Morgan Stanley Research

2 MORGAN STANLEY RESEARCH October 22, 2010 Busan Bank

Risk-Reward Snapshot: BSB (005280.KS, W14,400, OW, PT W18,000)

Risk-Reward View: A Good Benchmark for Korean Banks Why We Are Overweight ₩25,000 • BSB has been able to maintain

₩21000 (+46%) higher-than-industry average ROE 20,000 owing to advantages held as a ₩18,000 (+25%) provincial bank in relation to funding ₩ 14,400 and lending. 15,000 • The Busan/Kyongnam area has ₩12500 (-13%) relatively more robust industrial activity 10,000 owing to healthy automotive and machinery industries. • BSB has announced plans to convert 5,000 into an FHC and expand its scope of business in non-banking.

0 • We believe BSB would be better Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 positioned than peers to benefit from Price Target (Oct-11) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~005280.KS~ industry consolidation.

Price Target W18,000 Base-case scenario, Gordon Growth model. Key Value Drivers • Advantage in funding and loan pricing Bull 1.37x Bull Local economy shows stronger recovery than expected; Case Case 11e diversification of business base: Stronger lending demand and owing to relatively more loyal customer W21,000 P/B increased productivity levels enable BSB to enhance base. fundamentals. Conversion into an FHC followed by regional bank • Core deposit base benefits from BSB’s consolidation could present substantial benefits. strength in corporate deposit-taking and local retail deposit operations. Base 1.18x Base Normalization of operations: Expected ROE for the base case is • Local industrial activity key to growth. Case Case 11e 14.3% for 2011. Credit costs continue to stabilize while operating W18,000 P/B costs are kept under control. Potential Catalysts

Bear 0.82x Bear Stalled recovery and increased competition: Credit costs • Positive news flow on capital Case Case 11e expected to rise in a delayed recovery scenario. Increased management (dividends). W12,500 P/B aggressiveness by competitors could have negative impact on NIM • Regional economies pick up robustly. and credit cost. • Together with holding company conversion, non-bank operations Net Interest Income, Non Interest Income, and Credit Cost Are Key strengthen. • Regional bank consolidation. 25,000 1,125 Key Risks 1,125 20,000 750 1,737 1,447 21,000 • Performance of local economy is 2,316 18,000 15,000 relatively weaker than national average. 12,500 10,000 • Increased activity by competitors such

5,000 as NACF and nationwide banks. South KoreanSouth (W) Won

0 Bear Lower net Lower net Higher Base Higher net Higher net Lower Bull Case interest non-int credit cost Case interest non-int credit cost Case income income income income

Source: Morgan Stanley Research, FactSet

3 MORGAN STANLEY RESEARCH October 22, 2010 Busan Bank

3Q10 Results Review

Record High Bottom-Line Profit Stronger Top Line Revenues Realized Busan Bank (BSB) released stronger-than-expected 3Q10 Net operating revenue increased to W256bn in 3Q10 by 7.1% results. The net profit was a record-high W103bn, better than Q/Q. Even though the NIM deteriorated (12bp È Q/Q), the our estimate (W86bn) and consensus (W95bn). The strong strong KRW loan growth (3.4% Q/Q) supported the top line. In results mainly came from better-than-expected top-line addition, the bank enjoyed bigger net non-interest income revenue (a good defense of NII + bigger net non-interest mainly due to less loss from NPL sales etc. income). Both credit costs and operating costs remained well under control during the quarter. Also, there was a one-off gain • BSB’s KRW loan growth recorded 3.4% Q/Q; the main on disposal of equity method investments (Korea Leasing: driver was the SME segment, with loan growth of 4.0% W3.6bn) Q/Q. We believe this is related to the recovery of the regional economy of the Busan/Kyungnam/Ulsan area. As BSB proved its mettle again through 3Q10 results and we it shows improvement, loan demand from SMEs based in expect the bank to continue to deliver solid earnings. To reflect this area should pick up. surprising 3Q10 results, we have raised our 2011E NP by 12%, to W408bn from W362bn. To reflect the bank’s strong • SMEs in the steel/auto/shipbuilding industries continues to profitability and better outlook, we raise our price target to show asset quality stabilization and profitability W18,000 from W15,500. We maintain our OW rating on the improvement. We believe this would make BSB’s lending stock. proclivity towards SMEs more bullish. The company expects loan growth around the 10% level in next year. Exhibit 1 BSB: Key Summary of 3Q10 Results Exhibit 2

(Won in billions) 3Q10P 3Q09A Chg (y-y) 2Q10A Chg(Q-Q) Healthy Loan Growth with SMEs Being the Main Driver Income Statement Net Interest Income 226 216 4.6% 224 0.9% (Won in billions) 4Q09 1Q10 2Q10 3Q10 Q/Q growth Net Non-Interest Income 30 11 162.2% 15 97.4% KRW loans 17,843 18,057 18,884 19,534 3.4% Net Operating Revenue 256 227 12.5% 239 7.1% SME 12,501 12,689 12,989 13,504 4.0% Operating Exp 94 89 5.5% 92 2.3% Large corp 649 575 677 682 0.7% PPOP 162 138 17.1% 14710.1% Household 4,093 4,147 4,493 4,597 2.3% Loan Loss Provisions 27 28 -3.2% 29 -6.0% Others 600 647 725 751 3.6% Operating Profit 135 110 22.2% 118 14.0% Source: Company data, Morgan Stanley Research

Pretax Income 136 111 23.1% 119 14.7% • BSB’s quarterly NIM dropped to 3.06% by 12bps in 3Q10. Net Profit 103 84 23.3% 90 14.1% The main reasons were 1) a sharp decrease in the Balance Sheet financial debenture rate early this year, and 2) the delay of Total Assets 34,319 30,959 10.9% 33,177 3.4% interest payment of restructured companies until the Gross Loans 21,950 20,292 8.2% 21,479 2.2% workout program starts. Customers' Deposit 20,647 18,027 14.5% 19,563 5.5% Shareholders' Equity 2,406 2,057 17.0% 2,298 4.7% Key Operating Indicators • Looking at the monthly NIM trend, it is now on an upward ROA (annualized) 1.2% 1.1% 0.1ppt 1.1% 0.1ppt trajectory. (September: 3.12%, August: 3.04%, July: ROE (annualized) 17.4% 16.5% 0.9ppt 16.1% 1.3ppt 3.02%). We expect flattish or slightly decreasing quarterly Cost/Income 36.7% 39.2% -2.4ppt 38.4% -1.7ppt NIM trend in 4Q10 because of a drop in financial Tier 1 ratio 11.1% 10.4% 0.7ppt 11.1% 0.1ppt debenture rate in September. Source: Company data, Morgan Stanley Research

4 MORGAN STANLEY RESEARCH October 22, 2010 Busan Bank

Exhibit 3 • The delinquency ratio rose to 0.56% in 3Q from 0.43% in Quarterly NIM Deteriorated In 3Q10 2Q. This is mostly due to a one-off factor. There were 3Q09 4Q09 1Q10 2Q10 3Q10 W19bn of delinquent loans from Dukwon E&C – the NIM (daily basis) (%) 3.15 3.44 3.38 3.18 3.06 company is now ahead of its workout program, since it was Yield on IEA (%) 6.01 6.17 6.03 5.83 5.68 selected as a restructuring target back in Jun 10. As the Cost of funding (%) 2.99 2.88 2.86 2.80 2.72 workout program starts in 4Q10, we expect the one-off Volume/Rate analysis delinquent loans would be unwound. Avg IEA (Wbn) 26,599 26,908 27,114 27,701 28,379 NII (Wbn) 216 236 226 224 226 Exhibit 4 NII change (Wbn) 5 21 (10) (3) 2 Healthy Asset Quality Trend Continued Change from volume (0) 3 3 5 4 (W bn, ) 3Q09 4Q09 1Q10 2Q10 3Q10 Change from rates 4 17 (13) (7) (2) Total Loan Amount 20,630 20,381 20,550 21,657 22,241 Interest income -13 +11 -18 -9 -6 NPLs (Sub & Below) 287 223 267 268 252 Interest expense -18 -7 -5 -2 -3 NIPLs (Prec & Below) 779 717 759 752 825 Source: BOK, Morgan Stanley Research Loan loss reserve 337 306 332 339 343 • Non-interest income showed improvement. The main Write-offs/NPL sales 100 157 65 148 62 reasons were 1) less loss from NPL sales, 2) increasing Provisioning exp. 29 21 37 22 32 dividend income, and 3) bigger securities investment related gains. As less NPL sales expected along with NPL Ratio (%) 1.39 1.09 1.30 1.24 1.14 asset quality stabilization in 2011, non-interest income NIPL Ratio (%) 3.77 3.52 3.70 3.47 3.71 should remain at least at its current level, in our view. NPL coverage ratio (%) 117.3 137.3 124.4 126.5 135.8 NIPL coverage ratio (%) 43.2 42.8 43.7 45.1 41.5 Stabilizing Asset Quality Trend Gross NPL Formation 68 93 109 149 46 BSB has again proved strong asset quality. Credit costs As of total (%) 0.33 0.46 0.53 0.69 0.21 remained at a lower level and gross NPL formation has sharply Gross NIPL Formation 71 95 108 140 135 decreased. The delinquency ratio increased somewhat in 3Q, As of total (%) 0.34 0.47 0.52 0.65 0.61 Source: Company data, Morgan Stanley Research but it’s not an alarming level, considering the influence of a one-off factor in 3Q. SG&A cost • Provisioning costs were W27bn (50bps as of total loans) in BSB’s operating costs have been kept under control. SG&A 3Q10 vs. W29bn (55bp) in 2Q10. We saw improvement in cost increased by 2.3% Q/Q, but thanks to increased revenue all segments, including corporate and household. The stream, cost-to-income ratio decreased by 1.7%pt Q/Q in 3Q10. additional provisioning from tougher PF guidelines was We expect the cost to increase in 4Q10 due to the seasonality only W4.2bn. Considering current provisioning is lower (e.g. bonus payment), but it should be at a manageable level. than the yearly target, we expect more conservative provisioning to come in 4Q10, but it should be at a Exhibit 5 manageable level. Operating Cost To Be Under Control (Won in billions) 2007 2008 2009 2010E 2011E • NPL ratio continued to decrease (1.14% in 3Q10 vs. SG&A 359 377 388391 404 1.24% in 2Q10). We believe this is positive because there Cost/income (%) 45.0 43.1 44.8 39.6 38.7 were fewer NPL sales (W33bn) and write-offs (W29bn) in Cost/Asset (%) 1.51 1.37 1.32 1.19 1.12 3Q10. Source: Company data, Morgan Stanley Research

• Gross NPL formation sharply decreased to W46bn (21bp Capital Adequacy Trend as of total loans) in 3Q vs. W149bn (69bp). On the other Capital adequacy ratio (CAR) improved to 15.6% in 3Q10 vs. hand, gross NIPL formation decreased only slightly 15.1% in 2Q10. We expect this trend to continue, reflecting because some new precautionary loans were initiated resilient bottom-line profits as well as better RWA management. from strengthening PF guidelines. Ahead of forming a financial holding company, BSB may not be able to be proactive in dividend payout. We expect a 10% dividend payout ratio in 2010 (W200/share) vs. 12% in 2009.

5 MORGAN STANLEY RESEARCH October 22, 2010 Busan Bank

Exhibit 6 Key downside risks for the industry include: 1) prolonged Strong Earnings Support Resilient Capital global economic slowdown with problems emerging in the Adequacy Ratio Chinese economy; 2) greater-than-expected downturn in the (Won in billions) 3Q09 4Q09 1Q10 2Q10 3Q10 property market; and 3) resurgence of severe competition. Tier 1 capital 2,230 2,250 2,353 2,449 2,557 Total capital 3,167 3,185 3,216 3,353 3,592 Company-specific downside risks are: 1) RWA 21,484 21,694 21,813 22,166 22,986 slower-than-expected margin improvement; 2) slower Tier 1 ratio (%) 10.4 10.4 10.8 11.1 11.1 economic recovery in the Busan area; and 3) possible asset BIS ratio (%) 14.7 14.7 14.7 15.1 15.6 quality deterioration. Source: Company data, Morgan Stanley Research

Exhibit 7 Forming a FHC Should Be Positive Price/Book Trend BSB announced in September that it would form a financial 21,000 holding company (FHC) early next year. If all goes well, BSB is 18,000 supposed to convert itself into a holding company in March 15,000 2011. 12,000

• Local press (Yonhap, September 17, 2010) says that 9,000

BSB’s formation of a FHC should be the first step to 6,000 acquire Kyungnam Bank (KNB). At the earnings 3,000 conference call, management did not mention it specifically, but we believe there would be some cost - synergies (e.g. reduction of unnecessary operation cost) Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

as well as revenue synergies (e.g. margin improvement Price (won) 0.40x 0.75x 1.10x 1.45x 1.80x from less competition) if the deal takes place. Source: WISEfn, Morgan Stanley Research

• Even without the M&A possibility, once BSB forms a FHC Exhibit 8 next year, we believe the profitability of the new group Price/Earnings Trend

should be improving as synergies materialize between 21,000 subsidiaries (Busan Bank, BS Securities, and BS Capital). 18,000

Price Target and Risks 15,000 12,000 To reflect BSB’s stronger results and positive outlook, we raise our price target to W18,000 from W15,500. We use a Gordon 9,000 Growth model, (ROE – g) / (COE – g), to value BSB because 6,000 we believe that method offers a fair reflection of the bank’s P/B 3,000 and ROE. P/B has historically shown a close correlation with stock price returns. We assume a risk-free rate of 5%, an equity -

risk premium of 6.5%, and a beta of 1.03 (previously 1.0) to Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 arrive at a cost of equity of 11.7% (previously 11.5%). We apply Price (won) 1.00x 3.75x 6.50x 9.25x 12.00x a sustainable ROE of 12.3% with a growth rate of 5%. Our price target implies a 2011E P/B of 1.18x. The stock is currently Source: WISEfn, Morgan Stanley Research trading at 0.94x book value with expected ROAE of 15.4% based on 2011E.

6 MORGAN STANLEY RESEARCH October 22, 2010 Busan Bank

Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO

basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings.

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(Registration number 199206298Z, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley"). For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Joon Seok. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies As of September 30, 2010, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: KB Financial Group, Shinhan Financial Group. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Industrial Bank of Korea, Korea Exchange Bank, Shinhan Financial Group. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Industrial Bank of Korea, Korea Exchange Bank. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Hana Financial Group, Industrial Bank of Korea, KB Financial Group, Korea Exchange Bank, Samsung Card, Shinhan Financial Group, Woori Finance Holdings. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Busan Bank, Hana Financial Group, Industrial Bank of Korea, Korea Exchange Bank, Shinhan Financial Group, Woori Finance Holdings. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Hana Financial Group, Industrial Bank of Korea, KB Financial Group, Korea Exchange Bank, Samsung Card, Shinhan Financial Group, Woori Finance Holdings. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Busan Bank, Daegu Bank, Hana Financial Group, Industrial Bank of Korea, Korea Exchange Bank, Shinhan Financial Group, Woori Finance Holdings. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of September 30, 2010) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

7 MORGAN STANLEY RESEARCH October 22, 2010 Busan Bank

Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Stock Rating Category Count Total Count Total IBC Category Overweight/Buy 1115 42% 394 43% 35% Equal-weight/Hold 1146 43% 413 45% 36% Not-Rated/Hold 14 1% 4 0% 29% Underweight/Sell 381 14% 99 11% 26% Total 2,656 910

Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index on a risk-adjusted basis, over the next 12-18 months. Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. . Stock Price, Price Target and Rating History (See Rating Definitions)

8 MORGAN STANLEY RESEARCH October 22, 2010 Busan Bank

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9 MORGAN STANLEY RESEARCH October 22, 2010 Busan Bank

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10 MORGAN STANLEY RESEARCH

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Industry Coverage:S. Korea Financial Services

Company (Ticker) Rating (as of)Price* (10/21/2010)

Joon Seok Busan Bank (005280.KS) O (09/10/2009) W14,400 Daegu Bank (005270.KS) E (09/10/2009) W15,200 Hana Financial Group (086790.KS) E (09/10/2009) W32,950 Industrial Bank of Korea O (09/10/2009) W16,400 (024110.KS) KB Financial Group (105560.KS) O (11/27/2009) W52,500 Korea Exchange Bank (004940.KS) O (09/10/2009) W13,100 Samsung Card (029780.KS) O (04/21/2010) W57,100 Shinhan Financial Group O (09/10/2009) W44,050 (055550.KS) Woori Finance Holdings E (01/12/2009) W14,550 (053000.KS)

Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted.

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