1. Would new Consolidated Financial Law lead to Big Bang in Korea? Namuh Rhee>> Managing Director Merrill Lynch (822) 3707 0462 namuh_rhee@ml.com December 9, 2006 Refer to important disclosures on last page. Analyst Certification on rear. Merrill Lynch, as a full-service firm, has or may have business relationships, including investment banking relationships, with the companies in this report. >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under NYSE/NASD rules.

2. 2 HK emerging as intra-Asian center for capital raising….. % share of world worldwide IPO proceeds *October 27 YTD (Source: Thomson Financial)

3. 3 ….While capital market activities in Korea declining Debt financing proceeds (corporate) - Korea Equity financing proceeds – Korea (Source: MOFE)

4. 4 Is new Consolidated Financial Law addressing key issues?  Move in the right direction in creating a level playing field.  But the new law appears to have been drafted from regulator’s perspective than securities firm’s.  The Law is not radical enough - true “Big Bang” requires a drastic reform.  It should focus on inducing competition and help securities houses to understand and develop critical success factors.  Without a well-developed capital market, Korea is in danger of becoming backwater and its long-term growth potential would be jeopardized.

5. 5 Regulation with light touch is essential  Hank Paulson said “The US needs to adopt a more flexible UK-style approach to regulating its capital markets if they are to remain globally competitive”.  Rules-based approach cannot keep up with the pace of capital markets innovation.  To compete with other fast-growing Asian financial markets, Korea needs a principles-based system to deal with new or special situations.  Negative system vs. positive system.  The country’s top leaders must understand and seek solutions.

6. 6 Restrictive issues are one of many fundamental problems for local securities firms…..  Many houses are extremely risk-averse due to management structure and regulatory guidelines.  Many CEO of chaebol-associated brokerage firms consider his position as a springboard to next job within the group and groups chairman’s offices typically discourage risk-taking activities.  Authorities prohibit securities firms from leveraging their balance sheets via tight control of “Net operating capital ratio”.  Table: Major Korean and US securities firms’ leverage and net operating capital ratios (%) *Note: Assumed $1 = W930, data as of June 2006 for Korean companies, end 3Q for US comps.

7. 7 Two fastest growing segments of global finance are missing in Korea  Hedge funds: Off-shore HFs are active in Seoul cash and derivatives markets but on-shore HFs are non-existent due to underdeveloped regulatory and tax framework.  Private equity funds: Few local PE funds have taken off but commercial banks dominate leverage finance business and “permanent establishment” tax issue are complicated for foreign PEs.  Given a growing number of “sophisticated investors”, authorities should allow and make it easy to establish alternative investment firms in Korea; if not, HK, Singapore and Japan should take away all related businesses in Asia.

8. 8 Remove entry barrier for start-up managers  Why substantial “paid-in-capital” is required to start an investment fund that competes on idea and innovation?  Create a level playing field for all players in non-banking industry; if not, young, bright talents should leave the country.  Singapore is a paradise for emerging fund managers: - Registration with the MAS is simple and easy - Auditing is not required for SMEs - Tax incentives for “approved managers”

9. 9 Why foreign firms are not listing in Korea?  Large Chinese companies seek HK listings while their smaller counterparts go to Singapore for IPOs; major banks hire more bankers/analysts in HK and Singapore to handle/analyze these IPOs.  Four reasons why there’s no foreign listing in Korea: 1. No valuation premium 2. Small institutional investor base 3. Regulatory hurdles 4. Language problem

10. 10 Excessive investor protection could hurt market efficiency  Enhancing investor protection is important for broadening of financial market.  But the level of supervision should not “seek to achieve the impossible task of protecting fools from their own folly” but rather “be no greater than is necessary to protect reasonable people from being made fools of”.  Too much restrictions on securities firms and their research operations could disrupt flow of information and lead to market distortion.

11. 11 Three critical factors for Youido to become global financial marketplace and vital asset to Korean economy  Competitive and business-friendly tax and regulatory system.  High quality infrastructure.  Labor force with the right skills.

12. 12 Without radical reform, Korea is in danger of becoming backwater Source: Asian Journal

13. 13 Options for Korean securities firms  Domestic mergers should not create synergy given identical business model; there’s no specialized boutique house; only cost savings could be achieved.  Virtually impossible for uncompetitive small firms to exit given high tax charges for major shareholders  Overseas M&As could be one of viable options to grow and acquire skills: - Japan’s SPARX and Nomura Securities. - Stock valuations are relatively high giving domestic firms currencies to make acquisition. - Table: Korean securities firms’ valuation *Note: Assumed $1 = W930, data as of June 2006 for Korean companies, end 3Q for US comps.

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