WF

Business Context and Reporting Period

Company: Woori Finance Holdings Co., Ltd. (Woori Financial Group)

Filing Type: Form 20-F (Annual Report)

Reporting Period: Fiscal year ended December 31, 2008

Accounting Basis: U.S. GAAP

Overview: Woori Financial Group is Korea's first financial holding company, established in 2001 to consolidate government interests in distressed financial institutions. The group operates through major subsidiaries including Woori Bank, Kyongnam Bank, and Kwangju Bank, offering commercial banking, credit cards, capital markets, asset management, and insurance services. As of December 31, 2008, the Korea Deposit Insurance Corporation (KDIC) owned approximately 72.97% of the company's outstanding common stock.

Key Financial Metrics (Year Ended Dec 31, 2008)

Note: US$ conversions based on the exchange rate of 1,262.0 Won = 1.00 US$ as of December 31, 2008.

Material Changes vs. Prior Period (2007)

• Profitability Decline: Net income plummeted from Won 2,242 billion in 2007 to Won 150 billion in 2008, a decrease of approximately 93%. This was primarily driven by a massive increase in loan loss provisions and valuation losses on securities.
• Loan Loss Provisions: The provision for loan losses surged to Won 1,608 billion in 2008, compared to Won 219 billion in 2007, reflecting deteriorating asset quality due to the global financial crisis.
• Asset Quality Deterioration: Non-performing loans (NPLs) increased to Won 2,088 billion (1.11% of total loans) in 2008, up from Won 1,121 billion (0.70%) in 2007. The allowance for loan losses rose to Won 2,942 billion.
• Revenue Mix: While total revenue increased to Won 16,860 billion, non-interest income dropped significantly to Won 1,307 billion from Won 2,222 billion in 2007, largely due to trading losses and lower fee income.
• Dividends: The company paid no cash dividends for the 2008 fiscal year, a departure from previous years where dividends were paid.

Guidance, Outlook, Risks, and Contingencies

Management Commentary and Outlook

Management highlighted the severe impact of the global financial crisis on the Korean economy and the group's performance. The company emphasized its strategy to improve asset quality, strengthen risk management, and diversify revenue streams. In March 2009, the group entered into a new two-year business normalization plan with the KDIC, setting targets for capital adequacy, return on assets, and expense ratios for 2009 and 2010.

Key Risks and Contingencies

• Global Financial Crisis Impact: Significant exposure to adverse developments in U.S. mortgage markets (collateralized debt obligations) and global credit markets (derivatives). The company recognized impairment losses of Won 332 billion on CDOs and Won 370 billion on credit derivatives in 2008.
• Asset Quality Concentration: High exposure to small- and medium-sized enterprises (SMEs), which constitute over 40% of the loan portfolio. Delinquency ratios for SMEs rose in 2008. Additionally, significant exposure to the construction and shipbuilding sectors, which faced severe downturns.
• Government Influence: The KDIC, as the controlling shareholder, may direct the company to support specific sectors or borrowers (e.g., SMEs, exporters) as a matter of public policy, potentially conflicting with profit maximization.
• Regulatory Compliance: The company failed to meet certain financial targets (ROA, expense-to-revenue ratio) under its memorandum of understanding with the KDIC as of December 31, 2008. Sanctions were pending as of the filing date.
• Capital Adequacy: While capital ratios exceeded minimum requirements, the company received capital injections from the government's bank recapitalization fund in March 2009 to bolster its position.

Investor Verification Checklist

• Asset Quality Trends: Verify the trajectory of non-performing loans and the adequacy of the allowance for loan losses, particularly regarding the SME and construction/shipbuilding sectors.
• Government Support Terms: Review the specific terms of the capital injections received from the KDIC and the government's bank recapitalization fund, including any restrictions on dividends or management changes.
• Derivatives and CDO Exposure: Assess the remaining exposure to U.S. sub-prime related assets and credit derivatives and the potential for further valuation losses.
• KDIC Memorandum of Understanding: Monitor the company's ability to meet the new financial targets set in the March 2009 business normalization plan to avoid further sanctions.
• Dividend Policy: Confirm the resumption of dividend payments, noting the suspension in 2008 and the regulatory constraints on subsidiary distributions.