KEB Hana Bank US$5 Billion Global Covered Bond Program

Presale: KEB Hana Bank US$5 Billion Global Covered Bond Program

January 11, 2021

PRIMARY CREDIT ANALYST This presale report is based on information as of Jan. 11, 2021. The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final Yalan Tao ratings that differ from the preliminary ratings. Hong Kong + 852 2532 8033 yalan.tao @spglobal.com

SECONDARY CONTACTS

Jerry Fang Hong Kong + 852 2533 3518 jerry.fang @spglobal.com

Annie Wu Hong Kong + 852 2532 8077 annie.wu @spglobal.com

Major Rating Factors

Strengths

- Dual recourse to both the highly-rated issuer KEB Hana Bank and the cover pool comprising Korean mortgage loans with weighted-average current loan-to-value ratio (LTV) of 53.64%.

- Protection provided by the Korean Covered Bond Act and supervision regulation on issuance of covered bonds issued by Korea's Financial Services Commission (FSC) (together, the Korean Covered Bond Laws).

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- The asset coverage test could partially mitigate asset performance deterioration and deposit set-off risk.

- Liquidity risk is mitigated through structural mechanisms. These include the extendable maturity for soft bullet covered bonds, and the pre-maturity test (PMT) for the relevant series of hard bullet covered bonds.

- Potential structural mitigants, such as a liquidity reserve should the rating on the issuer fall below 'A', enhance the short-term liquidity of this program.

Weaknesses

- The rating on the covered bonds is susceptible to the rating on KEB Hana Bank. If the issuer credit rating on KEB Hana Bank is lowered from its current level, the maximum achievable covered bond rating will no longer be 'AAA', and the covered bonds will be downgraded.

- Because this is a new program, the limited liability profile of the covered bonds makes the program's asset-liability mismatch and target overcollateralization sensitive to any new issuance and the passage of time.

- Potential asset-liability mismatch might be amplified by the higher original loan term, up to 35 years, compared to other regions.

- Market value of the hybrid rate loans with interest rates reset less frequently than on a monthly basis, or only reset after certain dates, and fixed-rate loans in the cover pool are susceptible to interest rate movement. This is specifically if the loans are used to raise funds to pay the covered bonds at a time when the interest rate is much higher than today's.

- The potential basis risk, resulting from almost 100% of the cover pool being hybrid rate loans, which will convert from fixed rate to floating rates within five years from origination. Due to the dual-recourse nature, KEB Hana Bank will be first in line to cover senior expenses and interest payments to the bondholders or any potential negative carry generating from the cover pool due to the basis risk.

Rationale

S&P Global Ratings assigned its preliminary 'AAA' rating to the KEB Hana Bank US$5 Billion Global Covered Bond Program and its preliminary 'AAA' rating to the Series 1 covered bonds to be issued under it. The outlook is stable. We assume the Series 1 under the program will be a €500 million, fixed-rate, five-year maturity bond with bullet principal prepayments plus a one-year maturity extension feature.

Our covered bond rating process follows the methodology and assumptions outlined in our "Covered Bonds Criteria," published on Dec. 9, 2014, and "Covered Bond Ratings Framework: Methodology And Assumptions," published on June 30, 2015. From our analysis of the covered bonds issued by KEB Hana Bank, we have concluded that the assets in the cover pool are appropriately isolated from the risk of KEB Hana Bank's insolvency. This asset isolation allows us to potentially assign a higher rating to the covered bonds than our long-term issuer credit rating (ICR) on KEB Hana Bank (A+/Stable/A-1).

In accordance with our covered bonds criteria, we have determined the reference rating level (RRL) of the issuer, and attributed notches of uplift from this level through determination of jurisdictional support and collateral-based support. We assess the RRL at 'a+', based on the long

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term ICR on KEB Hana Bank and the potential government support for the bank.

Furthermore, we assess the jurisdiction-supported level at 'a+', which is mainly driven by our assessment of weak systemic importance and hence no uplift above the RRL.

The transaction benefits from up to four notches of collateral-based uplift, based on our covered bonds criteria. There are no notches deducted for liquidity issues or lack of overcollateralization commitment.

We analyzed the residential mortgage assets in the cover pool, based on our "Principles Of Credit Ratings" criteria, published on Feb. 16, 2011. As of Nov. 30, 2020, the assets backing the transaction comprise Korea residential mortgages totaling approximately Korean won (KRW) 3.7 trillion. For these assets, our measure of the weighted-average foreclosure frequency--the level of assumed defaults--is 21.93% and the assumed weighted-average loss severity--estimated losses given default--is 34.93%, as of Sept. 30, 2020, based on a 'AAA' stress level.

Based on our analysis, the minimum credit enhancement needed for the four notches of collateral-based uplift is 15.9% for the first series of covered bonds. Credit enhancement in the context of covered bonds is calculated as a percentage of the covered bond principal amount.

Our preliminary rating is based on our expectation that KEB Hana Bank will commit to maintain overcollateralization at a percentage that meets or exceeds the requirement for the four notches of collateral-based uplift. The covered bonds to be issued therefore can reach a 'AAA' rating from a credit and cash-flow perspective. The available credit enhancement is 466.57%, as a percentage of the covered bond principal amount, based upon the applicable foreign exchange rate and the cover pool as of Nov. 30, 2020.

There are no rating constraints relating to counterparty, legal, country, or administrative and operational risks. We assess country risk based on our "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions" criteria, published on Jan. 30, 2019. Under these criteria, we may rate the covered bonds up to four notches above the rating on the sovereign, Korea (AA/Stable/A-1+). As a result, country risk does not constrain the 'AAA' ratings on the covered bonds.

Outlook

The stable outlook on the covered bonds reflects the outlook on the sovereign ratings on Korea and the rating outlook on KEB Hana Bank. We may downgrade the covered bonds if we lower the ICR on KEB Hana Bank.

Program Description

Table 1

Program Overview*

Jurisdiction Korea

Covered bond type Regulated

Outstanding covered bonds (bil. EUR) 0.5

Redemption profile Soft bullet

Underlying assets Residential mortgages

Jurisdictional support uplift 0

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Table 1

Program Overview* (cont.)

Unused notches for jurisdictional support 0

Target credit enhancement (%) 15.9%

Available credit enhancement (%) 466.57%

Collateral support uplift 4

Unused notches of collateral support 0

Total unused notches 0

*Based on pool data as of Nov.30, 2020, and liabilities as of Jan. 11, 2021.

Dual recourse nature

Under the terms of the program, covered bonds to be issued under this program will be senior unsecured obligations of KEB Hana Bank, and are issued in accordance with the Korean Covered Bond Laws.

The covered bonds rank pari passu without any preference among themselves and with all other obligations of KEB Hana Bank that have been given prioritized claim over the cover pool pursuant to the Korean Covered Bond Laws and given the same priority as the covered bonds pursuant to the establishment deed.

At deal close for each series of covered bonds

KEB Hana Bank will issue the covered bonds as stipulated in the covered bond issuance plan to be registered with FSC and a pool of assets including mortgage loans will be designated as the underlying collateral for the covered bonds.

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Chart 1

Extendable maturity

An extendable maturity will apply to the relevant series of covered bonds (soft bullet covered bonds) if specified in the applicable pricing supplement. The scheduled redemption will be automatically extended to past the original maturity date to the extended maturity date if KEB Hana Bank fails to redeem all of the relevant series of covered bonds in full on the original maturity date. The covered bonds will bear interest during the maturity extension period. Other series of covered bonds will not be able to extend the maturity date if an extended maturity date is not specified in the pricing supplement (hard bullet covered bonds).

Before the occurrence of an issuer event of default

Flow of mortgage loan collections. KEB Hana Bank is obligated to pay interest and principal to the covered bondholders and manage the cover pool. The issuer needs to deposit mortgage loans collections into the transaction account within one business day, when the issuer is the account bank provider. Prior to the occurrence of an issuer event of default, the issuer has full operational control of the collection account after satisfying certain conditions.

Cross currency swap. Cross currency swaps will be entered prior to the deal close to mitigate currency mismatch in this program. The swaps are liability based. Prior to the service of an issuer event of default notice, amounts due and payable to the swap provider will be paid by the issuer and will not be paid from the assets in the cover pool.

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Payment arrangement

Chart 2

Following the occurrence of an issuer event of default

Flow of mortgage loan collections. Upon an issuer event of default, the asset monitor will assume control of bank accounts and receive proceeds and collections from the cover pool and payments from the swap provider. The asset monitor will apply collections on the mortgage loans to repay covered bonds or may arrange the disposal of the mortgage loans and other assets in the cover pool for such purpose.

Cross currency swap. The swap agreement will not be novated or terminated upon the service of an issuer event of default notice if the event is not triggered by failure of swap payments by the issuer, until the covered bonds are repaid or the serving of a covered bond event of default notice.

Payment arrangement

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Chart 3

Table 2

Covered Bond Transaction Participants

Rating Role Name Rating dependency

Issuer KEB Hana Bank A+/Stable/A-1 Yes

Swap provider To be determined Appropriately rated in accordance with Yes our counterparty criteria

Transaction and reserve cash KEB Hana Bank A+/Stable/A-1 Yes account provider

Servicer KEB Hana Bank A+/Stable/A-1 No

Asset monitor Korea Housing Finance AA/Stable/A-1+ No Corp.

Trustee BNY Mellon Corporate NR No Trustee Services Ltd.

NR—Not rated.

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Other structure features

Asset cover test. The asset cover test (ACT) is designed to ensure that the ratio of eligible assets in the cover pool to the principal outstanding amount of the covered bonds is maintained at a certain level to maintain the minimum amount of credit enhancement. The ACT is determined by a formula that adjusts the current balance of each mortgage loan to take into account, among other things, fluctuations in house prices, mortgage loans' arrears status and 70% LTV limit specified pursuant to the Korean Covered Bond Act. The set-off risk is also mitigated through the ACT formula when the ICR on KEB Hana Bank is lowered below 'BBB' or 'A', depending on the deposits at that time maintained by the borrowers.

The asset monitor will conduct tests in respect of the accuracy of the calculations performed by KEB Hana Bank in relation to ACT periodically pursuant to transaction documents.

If the ACT is breached, the issuer may add additional mortgage loans or other eligible asset to the cover pool to cure the breach. A failure to cure the test by the second following calculation date will result in the occurrence of an issuer event of default.

PMT. PMT is intended to provide liquidity for hard bullet covered bonds when the issuer ceases to maintain a short-term foreign currency ICR at least at 'A-1' as assigned by S&P Global Ratings. At that point the issuer is required to add eligible liquid assets, with the intention that the eligible asset value will at least be equal to the aggregate principal amount outstanding of all series of hard bullet covered bonds that mature within 12 months.

Amortization test. Following the service of an issuer event of default notice but prior to the service of an acceleration notice (to notify the occurrence of a covered bond event of default): (1) the issuer will procure that the sum of current balance of each mortgage loan taking into account only the arrears status; and (2) other eligible assets in the cover pool will be at an amount at least equal to the KRW equivalent of the aggregate outstanding principal amount of all the covered bonds. A covered bond event of default will occur if the breach of the amortization test can't be cured within 30 days of such a breach.

Liquidity reserve. If KEB Hana Bank fails to maintain a long-term ICR of at least 'A', a reserve account will be topped up to an amount equal to:

- Aggregate amounts due to the swap provider in respect of interest in the immediately following three months;

- The sum of three months of fees to be due to the trust, asset monitor, replacement servicer and account banks; and

- The expenses associated with sending notifications to the underlying obligors and the mortgage credit insurance provider, upon the occurrence of cause of disposal of the cover pool under Article 6(1) of the Korean Covered Bond Act, subject to a floor of KRW 500 million. The transaction document has defined the occurrence of cause of disposal upon the service of an issuer event of default notice or acceleration notice.

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Rating Analysis

Legal and regulatory risks

The covered bonds are governed as per the Korean Covered Bond Laws.

We believe that the Korean Covered Bond Laws addresses the main legal aspects that we assess when looking at covered bond legislation, in particular the isolation of the covered pool assets from the risk of bankruptcy or insolvency of KEB Hana Bank. As a result, in our opinion, the rating on the covered bonds can be higher than the long-term ICR on KEB Hana Bank.

In line with our criteria, we have reviewed the following key aspects of the Korean Covered Bond Laws and transaction arrangement: (1) the segregation of the cover pool assets and cash flows; (2) the risk of acceleration of payments to bondholders, a payment moratorium, or forced restructuring of the covered bonds; (3) the treatment of hedging arrangements; and (4) access to funding after the issuer's bankruptcy.

With respect to the asset isolation analysis and access to funding after issuer's bankruptcy, the following key provisions from the Korean Covered Bond Act, underpin our conclusion:

- Ring fencing. Article 6 requires the registration of the covered pool by filing a covered bonds issuance plan with details specified to the SFC. The covered pool will then be ring-fenced from the other assets of the issuing bank.

- Asset separation. Article 8(1) states that the issuer should manage the cover pool separately from its other asset or cover pool registered according to other covered bond issuance plan.

- Bankruptcy remoteness. Article 12 states that the cover pool assets shall not be subject to insolvency proceedings with respect to a covered bond issuer or form part of the bankruptcy estate of a covered bond issuer. Furthermore, the cover pool will not comprise assets that are subject to administration of restructuring and rehabilitation.

- Priority right of payment. Article 13 stipulates that covered bond holders along with the asset monitor, the swap providers, and other transaction third parties shall have a priority right of payment on the registered cover pool over any third parties or creditors of a covered bond issuer.

- Dual recourse. Pursuant to Article 14, the bondholders have the right to payment from other assets of the issuer in addition to the cover pool, if the principal and interest of the covered bonds are not fully repaid from the cover pool.

In addition, pursuant to the transaction documents, the covered bonds will not accelerate due to the occurrence of an issuer event of default. The claims acquired from swap agreement will be registered as part of the covered bonds issuance plan and the swap provider also has a priority right of payment over the cover pool under the Korean Covered Bond Act. As such, there will be no arrangement of novation of the relevant swap agreement to a third party upon an issuer event of default.

In our consideration of legal risks, we look to our "Covered Bond Ratings Framework: Methodology And Assumptions," published on June 30, 2015.

Furthermore, Article 5 of the Korean Covered Bond Act allows the cover pool to contain liquid assets, such as cash, and other assets, such as Korean treasury bonds, in addition to mortgage loans. Article 5(3) further limits the liquid assets to no higher than 10% of the cover pool.

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Operational and administrative risks

In our opinion, there is no operational risk from the cover pool's management and loan origination that would constrain the covered bond rating to the same level as the long-term ICR on KEB Hana Bank. Our analysis of operational and administrative risks follows the principles laid out in our covered bond ratings framework.

Management of the covered bond transaction. In our view, potential operational risk arising from covered bond management following the servicing of an issuer event of default notice is mitigated by the arrangement that the asset monitor is appointed at deal close to provide certain services, acting for the benefit of the covered bondholders. In addition, the issuer will appoint a trustee for the benefit of the covered bondholders pursuant to the trust deed at deal close.

Following the serving of an issuer event of default notice, the asset monitor will:

- Manage, and dispose of all or part of the cover pool;

- Instruct the issuer or the replacement servicer to service the cover pool;

- Receive proceeds and collections from the cover pool and payments from any swap provider;

- Apply any cash and assets of the cover pool in accordance with the applicable priority of payments;

- If the issuer is also the transaction account bank, arranging for a new transaction account to be established with a replacement transaction account bank; and

- Appoint any replacement servicer or the relevant delegate.

In addition, if the issuer fails to serve the perfection notices following the occurrence of a cause of disposal event, the asset monitor will execute and serve perfection notices on the borrowers and on the mortgage credit insurance provider.

Potential operational risk due to KEB Hana Bank as the servicer. We consider KEB Hana Bank's servicing capability to be satisfactory.

KEB Hana Bank is one of the largest commercial banks in Korea, providing credit and financial services to individuals and small and medium enterprises. The bank has a long operating history and holds the top five market share of mortgage loans in Korea. An automated loan system has been adopted for the underwriting and all exception approvals are centralized at headquarters. The servicing process and arrears management is well established.

No back-up servicer is appointed at close. Should we downgrade KEB Hana Bank below 'B', the asset monitor will appoint a replacement servicer jointly with the issuer or solely to take over servicing should a servicer replacement event occur.

Resolution regime analysis

Resolution regime analysis is to consider whether or not an effective resolution regime is in place to increase the probability that an issuer could service its covered bonds even following a default on its senior unsecured obligation. In this program, we consider the RRL to be equal to the long-term ICR on KEB Hana Bank. This is because the long-term ICR already reflects a high likelihood of KEB Hana Bank receiving government support by virtue of its high systemic importance in Korea, and a highly supportive Korean government toward the banking sector.

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According to our criteria, we typically don't elevate the RRL above the ICR for issuers for which the ICR incorporates expectation of external government support. As a result, the RRL is equal to the ICR.

Jurisdictional support analysis

In our jurisdictional support analysis, we assess the likelihood that a covered bond program facing stress would receive support from a government-sponsored initiative instead of from the liquidation of collateral assets in the open market.

We base the overall jurisdictional support assessment on the weakest of three factors: legislative framework, systemic importance, and sovereign credit capacity. Using a four-point scale of very strong, strong, moderate, and weak, we assess Korea's legislative framework as very strong, systemic importance as weak, and sovereign credit capacity as very strong.

These assessments reflect several factors. In our opinion, Korea has a robust legal framework for covered bonds based on our understanding of the Korean Covered Bond Laws and other covered bond related regulations applicable to other issuers. We also incorporate our view of the role of covered bonds as a funding source for the Korean financial system and their importance to the economy. In addition, we assess that the sovereign has sufficient financial resources to support covered bonds.

As a result, we assess the jurisdictional support in Korea as weak mainly due to the limited role of covered bonds as a funding source for the Korean financial system and their importance to the economy. Therefore, we consider the rating level achieved based upon jurisdictional support (JRL) to be 'a+', same as the RRL.

Collateral support analysis (1)-- Cover pool composition

Cover pool characteristics

Tables 3, 4, and 5 contain summaries of the characteristics of the cover pool as of Nov. 30, 2020.

Table 3

Cover Pool Composition*

Asset type Value (bil. KRW) Percentage of cover pool (%)

Residential mortgages 3,720.8 100.0

Other assets 0 0.0

Total 3,720.8 100.0

*KRW—Korean won.

Table 4

Mortgage Pool Profile

Number of Mortgage Loans 21,965

Total current balance (KRW) 3,720,779,001,898

Average current loan balance (KRW) 169,395,812

Maximum current loan balance (KRW 1,318,453,664

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Table 4

Mortgage Pool Profile (cont.)

Weighted average current interest rate 2.58%

Weighted average seasoning (months) 5.83

Weighted average original tenor (months) 391.58

Weighted average remaining tenor (months) 385.76

Weighted average LTV 53.64%

Weighted average DTI (debt to income ratio) 27.95%

Average age of borrower at origination 44.07

Table 5

Mortgage Pool Characteristics

Current loan balance % of initial cover pool

Current Loan Balance (mil. KRW)

> 0 and <= 50 1.87

> 50 and <= 100 12.17

> 100 and <= 150 14.99

> 150 and <= 200 18.11

> 200 and <= 250 13.88

> 250 and <= 300 13.15

> 300 25.82

LTV

> 0% and <= 20% 3.68

> 20% and <= 25% 3.76

> 25% and <= 30% 5.77

> 30% and <= 35% 9.34

> 35% and <= 40% 9.02

> 40% and <= 45% 8.17

> 45% and <= 50% 11.83

> 50% and <= 55% 12.54

> 55% and <= 60% 15.41

> 60% and <= 65% 9.24

> 65% and <= 70% 11.25

> 70% 0.00

Interest Rate Type

Fixed 0.00

Floating 0.00

Hybrid 100.00

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Table 5

Mortgage Pool Characteristics (cont.)

Current loan balance % of initial cover pool

Property Type

Apartments 100.00

Other 0.00

Geographical Distribution

Seoul 12.77

Rest of the nation 87.23

Delinquencies

Current 100.00

> 0 day and <= 30 days 0.00

> 30 days and <= 60 days 0.00

> 60 days and <= 90 days 0.00

> 90 days 0.00

Eligibility criteria. Some of eligibility criteria for mortgage loans to be included in the cover pool are:

- Secured and first-ranking mortgage loan;

- The related mortgaged property is a private residential property;

- Each borrower is a natural person who is a Korean citizen or permanent resident, residing in Korea;

- No payment in respect of the mortgage loan has been rescheduled, amended, re-aged or changed to avoid or eliminate a delinquency or default or following a delinquency or default; and

- The mortgage loan has a LTV of 70% or lower.

Portfolio criteria. The inclusion of the mortgage loan in the cover pool must not cause a breach of the portfolio criteria below:

- Residential mortgage loans should satisfy the following the criteria: at least 20% must have a debt to income ratio equal to or lower than 70%; at least 30% must bear fixed interest rate; and not more than 10% must be loans of which 50% or more of their outstanding principal balance may be set off (mainly deposits) against a covered bond issuer. The nominal amount for the fixed interest rate calculation is adjusted by rules based on but not limited to interest rate type, interest rate reset criteria, origination year, maturity and remaining maturity.

Collateral support analysis (2)-- Assess the credit quality of the cover pool

Archetypical pool. We analyzed the cover pool based on our "Principles Of Credit Ratings" criteria, published on Feb. 16, 2011. In assessing the credit quality of a Korean residential mortgage pool, our approach is to ensure the methodology applied is consistent with our approach

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to rating residential mortgage-backed securities (RMBS) across markets, with the portfolio benchmarked against a defined archetypical pool.

When available, we used performance data from the local Korea market as the basis for our analytical approach. In the absence of such data, we have adopted the approach as outlined in our "Australian RMBS Rating Methodology And Assumptions" criteria, published on Sept. 1, 2011, if the loan characteristics are comparable.

With the Australian RMBS criteria forming the initial framework, we made adjustments to recognize features that might be unique or applicable to the Korea market.

The Korea archetypical pool reflects some market and product characteristics unique to Korea. However, when possible, archetypical pools aim to be as uniform as possible across markets for comparability reasons.

If the characteristics of a pool vary from the archetypical pool, we make adjustments to the credit enhancement. We might also make an adjustment to the credit enhancement to account for any product-specific features as well as originator and servicer practices.

Compared with our Australian RMBS criteria, the following are the archetypical pool characteristics that are specific to Korea:

- Mortgage-ranking and land-holding status. First-registered mortgage over freehold real estate in Korea.

- Geographic diversity – regional concentration limit (identified by local government). We apply a 1.8x multiple to regional concentration exceeding the thresholds outlined in table 6.

- Geographic adjustment – nonmetropolitan. In addition to region (local government) concentration limits, we also apply a 1.5x multiple for nonmetropolitan concentration limits for Korea, based on the administrative division classification of the local government in table 7.

- Property type. The archetypical pool assumes a security property as one of the following types of residential properties: apartments, detached houses, row houses, and multiplex houses.

- Maximum property value and market value decline. We applied an adjustment factor of 1.25x to the market-value decline assumptions for property value larger than KRW1 billion. This adjustment factor reflects the view that high-value properties are susceptible to demand/supply pressure that may lead to more volatility in resale value.

- Foreclosure period. We applied a foreclosure period of 18 months on typical loans, and a foreclosure period of 24 months on loans in excess of the archetypical pool's maximum property value.

Table 6

S&P Global Ratings' Region (Local Government) Concentration Limit

Seoul 40.0%

Busan 14.0%

Daegu 10.0%

Incheon 12.0%

Gwangju 6.0%

Daejeon 6.0%

Ulsan 5.0%

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Table 6

S&P Global Ratings' Region (Local Government) Concentration Limit (cont.)

Sejong 3.0%

Gyeonggi-do 49.0%

Gangwon-do 6.0%

Chungcheongbuk-do 7.0%

Chungcheongnam-do 9.0%

Jeollabuk-do 8.0%

Jeollanam-do 8.0%

Gyeongsangbuk-do 11.0%

Gyeongsangnam-do 14.0%

Jeju 3.0%

Table 7

S&P Global Ratings' Metropolitan Classification For Korea

Seoul Metropolitan

Busan Metropolitan

Daegu Metropolitan

Incheon Metropolitan

Gwangju Metropolitan

Daejeon Metropolitan

Ulsan Metropolitan

Sejong Metropolitan

Gyeonggi-do Nonmetropolitan

Gangwon-do Nonmetropolitan

Chungcheongbuk-do Nonmetropolitan

Chungcheongnam-do Nonmetropolitan

Jeollabuk-do Nonmetropolitan

Jeollanam-do Nonmetropolitan

Gyeongsangbuk-do Nonmetropolitan

Gyeongsangnam-do Nonmetropolitan

Jeju Nonmetropolitan

Summary of WAFF and WALS. In assessing the credit assumptions required to conduct cash flow analysis, we compare the characteristics of the cover pool with an archetypical pool and apply multiples as a way to increase or decrease weighted-average foreclosure frequency (WAFF) and weighted-average loss severity (WALS) to reflect higher or lower credit risk compared with the characteristics of the archetypical pool.

A summary of WAFF and WALS based on a 'AAA' stress level of the initial cover pool as of Sept. 30,

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2020, is shown in table 8.

Table 8

Summary Of Weighted-Average Foreclosure Frequency And Weighted-Average Loss Severity

'AAA'

Weighted-average foreclosure frequency (%) 21.93%

Weighted-average loss severity (%) 34.93%

Weighted-average foreclosure frequency and weighted-average loss 7.66% severity (%)

Assumptions

Benchmark foreclosure frequency for the Korea archetypical pool 10.0 (%)

Market value decline (%) 45.0

Weighted-average recovery period (months) 18.0

Interest rate through recovery period (%) 7.85

Fixed selling and legal costs (KRW) 5,000,000

Variable selling and legal costs (% of stressed market value) 3

Collateral support analysis (3)-- Cash-flow analysis

Cash flow modeling assumptions. We conduct cash flow analysis to assess collateral-based uplift. Our analysis focuses on collateral-based uplift up to four notches in part because the target rating requested is AAA.

In this program, to assign the first two notches of rating uplift above the covered bond program's JRL for programs that receive no jurisdictional support, we analyze the covered bond assets under a 'AAA' rating scenario and assuming no asset-liability mismatch according to our covered bond criteria.

To assign the third and fourth notches of rating uplift above the covered bond program's JRL, additional 'AAA' rating scenarios, assuming up to 100% of the refinancing costs, that is, the additional collateral required to raise funds against its assets to repay maturing covered bonds, have been considered.

We analyze to what extent overcollateralization enhances the creditworthiness of the covered bonds to be issued by considering both the credit risk and refinancing cost, which reflect expected losses incurred by the cover pool in a stressed scenario with certain key assumptions.

A summary of some of our key rating stresses and assumptions modeled at the 'AAA' rating level is as follows:

- The liability profile reflects cross-currency swap arrangement for this transaction.

- WAFF and WALS assumed at the 'AAA' rating level.

- Timing of defaults (see table 9).

- Foreclosure period and time to recover sale proceeds from defaulted loans.

- Prepayment rates assumed during the stress period (see table 10), and normalized prepayment

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rate post-stress period.

Mortgage loans in the cover pool reference to multiple benchmark interest rates in the Korean market. Key assumptions to stress the interest rates are as follows:

- Stressed interest rate curves in down, up, downup and updown scenarios.

- Stressed interest rate curves are created for cost of fund index rate (COFIX) and six-month bank debenture rate, as published in "Guidance: Methodology To Derive Stressed Interest Rates In Structured Finance", republished on Nov. 6, 2019.

- Assuming both COFIX acquired new fund and COFIX outstanding balance are equal to COFIX, floored at 0%.

- Assuming 91 days certificate of deposit is equal to six-month bank debenture rate + 15bps.

Table 9

Assumed Default Curves

Month Front-loaded default curve (%) Standard default curve (%) Back-loaded default curve (%)

7 10 10

12 25 15 5

18 15

24 30 25 25

36 20 25 25

48 10 15 15

60 5 10 10

72 5

Table 10

Assumed Constant Prepayment Rates

Low CPR scenario (% per Constant CPR scenario (% Fast CPR scenario (% per Transaction seasoning year) per year) year)

Up to month 12 3 20 20

Month 13 to month 18 3 20 35

Month 19 to month 36 3 20 45

Month 37 to end of assumed stress 3 20 55 period

CPR--Constant prepayment rate. Total CPR shown includes of voluntary and involuntary (default) prepayments. Assumed normalized CPR after assumed stress period is 10%.

Collateral support uplift before adjustments. Based upon information provided to us, the minimum credit enhancement, which would allow the covered bonds to receive four notches of collateral-based uplift, is 15.90%, as a percentage of the covered bond principal amount, before the two potential adjustments in the following section.

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Collateral support analysis (4)--Two adjustments

In terms of liquidity risk adjustment, the risk is mitigated through the extendable maturity for soft bullet covered bonds and the PMT for hard bullet covered bonds to mature within 12 months.

The adjustment for uncommitted overcollateralization is not applicable as the overcollateralization commitment is contractual as stated in the establishment deed. The overcollateralization commitment is also legally binding with a statutory required collateralization ratio at 105% in accordance with Article 5(2) of the Korean Covered Bond Act, which doesn't limit the contractual committed level of overcollateralization

Collateral support analysis (5)--Determine the collateral support uplift

Since there is no notch adjustment, the result of our analysis of the covered bonds' payment structure shows that the overcollateralization level needed by the program to receive a four-notch collateral-based uplift to achieve a 'AAA' rating is 15.90% of the covered bond principal amount. Our preliminary rating is based on our expectation that KEB Hana Bank will commit to maintain overcollateralization at a percentage that meets or exceeds our requirement for the four notches of collateral-based uplift.

Table 11

Collateral Uplift Metrics

As at Nov. 30, 2020

Asset weighted-average maturity (years) 32.15

Liability weighted-average maturity (years) 5

Credit enhancement commensurate with rating (%)* 15.90%

Available credit enhancement (%)* 466.57%

Required credit enhancement for first notch of collateral uplift (%)* 4.19%

Required credit enhancement for second notch of collateral uplift (%)* 4.19%

Required credit enhancement for third notch of collateral uplift (%)* 12.90%

Required credit enhancement for fourth notch of collateral uplift (%)* 15.90%

Target credit enhancement for maximum uplift (%)* 15.90%

Potential collateral-based uplift 4

Adjustment for liquidity (Yes/No) No

Adjustment for committed overcollateralization (Yes/No) No

*As a percentage of the covered bond principal amount.

Potential impact of COVID-19

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. While the early approval of a number of vaccines is a positive development, countries' approval of vaccines is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by mid-2021. We use this assumption in assessing the economic and credit implications

www.standardandpoors.com January 11, 2021 18

associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Counterparty risk

We have identified various counterparty risks to which the covered bonds are exposed. However, as these are structurally addressed in line with our counterparty criteria, we believe that they do not constrain the rating from a counterparty risk perspective (see "Counterparty Risk Framework: Methodology And Assumptions," published on March 9, 2019).

Bank account providers. At deal close, KEB Hana Bank will open a collection account and a reserve account under its name with itself as the account bank. The two accounts are to keep collections of mortgage loans in the cover pool and cash reserve set aside should we downgrade KEB Hana Bank below 'A'.

The program's exposure to the bank account providers is adequately mitigated through replacement and remedy mechanisms in the transaction documents that are consistent with our criteria to support maximum rating of 'AAA'. According to the transaction documents, should the ICR on the bank account provider fall below 'BBB' or if the account bank is KEB Hana Bank, and an issuer event of default notice is delivered, the issuer, or the covered bond administrator (following the occurrence of an issuer event of default), shall find a replacement account bank provider within 30 days.

Swap providers. In our view, the transaction's exposure to the swap providers is mitigated through replacement and remedy mechanisms in the transaction documents that are consistent with our criteria to support maximum rating of 'AAA'.

We believe a 'BBB' or higher replacement trigger to support 'AAA' is compatible with our criteria. To determine the minimum replacement rating trigger to support the maximum rating of AAA', our key consideration and rationale are:

- We assume the swap providers are unrelated to KEB Hana Bank and give credit to the issuer's ability and willingness to manage counterparty risk before a default.

- We also consider the covered bond issuer's RRL, which is 'a+' in this transaction. In our view, the higher the RRL, the greater the issuer's ability to mitigate counterparty risk.

- We assume the exposure to the swap providers to be concentrated (exposure to a single counterparty for which the total net notional amount is greater than 25% of the total net notional amount of derivatives with unrelated counterparties), given the unknown number of swap providers to be engaged for each series of covered bonds.

- KEB Hana Bank intends to structure swap arrangements to meet "moderate" collateral framework for collateral posting in accordance with our criteria.

According to the transaction documents, should the applicable rating on a swap provider fall below 'BBB', the swap provider shall be replaced within 90 days and post collateral within 10 business days. Together with other swap arrangements, we view that the transaction's exposure to the swap providers is mitigated through structures that are consistent with our criteria to support maximum rating of AAA.

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Country risk

We may rate the covered bonds up to four notches above the rating on the sovereign, Korea. As a result country risk does not constrain the ratings on the covered bonds.

We analyze country risk based upon our "Incorporating Sovereign Risk In Rating Structured Finance Securities" criteria. One of the key aspects we consider for a covered bond rated above the sovereign is the impact of refinancing risk on the covered bond's sensitivity to sovereign default.

The covered bonds will be issued in Korea, which is not a member of a monetary union, where the central bank is a supranational institution and rated higher than the respective sovereign. Hence, the cover pool administrator of this transaction has no access to refinancing sources such as repo facilities from a supranational institution.

The covered bonds include structural mechanisms, such as extendable maturity for soft bullet covered bonds and PMT for hard bullet covered bonds, that cover refinancing needs over a 12-month period in a sovereign default scenario. Therefore, we conclude that we may rate the covered bonds up to four notches above the sovereign rating on Korea.

Other risks

T&C risk. Transfer and convertibility (T&C) risk materializes when a sovereign restricts access to foreign exchange needed for debt service. Our T&C assessment on Korea is 'AAA'. Hence T&C risk does not constrain the rating on this program.

Super senior claims and mortgage insurance in regulatory LTV calculation. The mortgage loans to be included are first ranking. However, potential claims arising from key deposits placed by tenants, such as for small leases, pursuant to lease agreements may be protected by regulations if conditions are met. Thus such potential claims from tenants would still rank ahead of the mortgage claims under Korean regulations.

According to regulatory guideline, Korean mortgage lenders include super senior claims, net of the amount covered by mortgage insurance to calculate regulatory LTV ratio when underwriting mortgage loans.

When we estimated loss severity in our stress rating scenario, we factored in a potential super senior claim amount without deducting the mortgage insured/guaranteed amount. We did not give credit to the mortgage insurance/guarantee.

Servicer commingling risk. In our view, the potential servicer commingling risk is largely mitigated in light of the program structure and in accordance with the Korean Covered Bond Act. As such, we don't incorporate any servicer commingling loss in our cash flow analysis.

In addition, KEB Hana Bank as the servicer for the mortgage loans needs to deposit mortgage loans collections into the transaction account within one business day. If the issuer is no longer the account provider, arrangement for direct debit of loan payments to the transaction account is required.

Deposit set-off risk. KEB Hana Bank is a deposit-taking institution, which could potentially pose deposit set-off risk to the covered bonds. The risk is mitigated through ACT that requires sufficient overcollateralization to compensate the potential set-off risk exposure when the ICR on KEB Hana

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Bank is lowered below 'BBB' or 'A', depending on the deposit, the exposure of set-off risk, at that time maintained by the borrowers.

Related Criteria

- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019

- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019

- Criteria | Structured Finance | General: Foreign Exchange Risk In Structured Finance--Methodology And Assumptions, April 21, 2017

- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017

- Criteria | Structured Finance | Covered Bonds: Covered Bond Ratings Framework: Methodology And Assumptions, June 30, 2015

- Criteria | Structured Finance | Covered Bonds: Covered Bonds Criteria, Dec. 9, 2014

- Criteria | Structured Finance | General: Global Framework For Cash Flow Analysis Of Structured Finance Securities, Oct. 9, 2014

- Criteria | Financial Institutions | Banks: Assessing Bank Branch Creditworthiness, Oct. 14, 2013

- Criteria | Structured Finance | General: Global Derivative Agreement Criteria, June 24, 2013

- General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012

- Criteria | Structured Finance | RMBS: Australian RMBS Rating Methodology And Assumptions, Sept. 1, 2011

- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

- Criteria | Structured Finance | RMBS: Methodology And Assumptions For Analyzing The Cash Flow And Payment Structures Of Australian And New Zealand RMBS, June 2, 2010

- Criteria | Structured Finance | General: Methodology For Servicer Risk Assessment, May 28, 2009

Related Research

- KEB Hana Bank, Dec. 11, 2020

- S&P Global Ratings Definitions, Aug. 7, 2020

- Credit Conditions Asia-Pacific: The Rebound Has Begun, Dec. 3, 2020

- Republic of Korea 'AA/A-1+' Ratings Affirmed; Outlook Stable, April 21, 2020

- Glossary Of Covered Bond Terms, April 27, 2018

- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016

- Global Covered Bond Characteristics And Rating Summary, published quarterly

www.standardandpoors.com January 11, 2021 21

- Assessments For Target Asset Spreads According To Our Covered Bond Criteria, published annually

- Assessments For Jurisdictional Support According To Our Covered Bonds Criteria, published annually

www.standardandpoors.com January 11, 2021 22

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