UPDATE 1-Woori Bank to draw on govt fund, considers new bonds

* Woori Bank to use over $1.4 bln from government-led fund

* Woori eyes exchangeable bonds for $400 mln debt

* 2009 net interest margin seen down, earnings to improve (Adds more CEO quotes, background)

SEOUL, Feb 16 (Reuters) - South Korea's Woori Bank will secure more than $1.4 billion in new capital from a $15 billion fund the government is set to launch, as continuous lending to small firms and corporate restructuring will take a toll on its financial health.

Woori, a unit of Woori Finance Holdings (053000.KS) (WF.N), is also considering issuing exchangeable bonds for $400 million of subordinated debt for which the bank decided last week not to exercise a call option, Woori Bank Chief Executive Lee Chonghwi said on Monday.

"We are planning to use more than 2 trillion won ($1.4 billion) from the recapitalisation fund," Lee told a news conference.

"Providing support to small companies and corporate restructuring will cause us to incur losses and we will need new money. There is no reason not to make use of the fund, which offers lower-than-market rates."

Woori, the country's No. 2 lender by assets after Kookmin Bank, becomes the first South Korean bank to make public its plan to tap the fund.

The country's top four banks -- Kookmin, Woori, Shinhan and Hana -- and five other lenders on Sunday agreed to roll over loans extended to small- and medium-sized enterprises (SME) maturing this year and to make full use of the recapitalisation fund. [ID:nSEO21892]

LENDING OUTLOOK

In 2009, Woori Bank also plans to lend a fresh 6.1 trillion won to small- and medium-sized companies, or an amount comparable to last year's 6.6 trillion won loans to SMEs.

Lee expects interest rates to continue their downward spiral for a considerable period and to pull banks' net interest margin, a key profitability measure, sharply lower this year, as banks' lending rates mostly move in line with short-term market rates.

But belt-tightening measures, such as the closure of loss-making branches, and the absence of additional loss from Woori's exposure to U.S. subprime-related assets will help improve the bank's 2009 earnings, the CEO said, although loan-loss provisioning costs could increase.

Woori posted a quarterly loss last week, pushing down its 2008 net profit to 234 billion won against the previous year's 1.7 trillion won, due to heavy losses from its U.S. subprime assets and provisioning costs against bad loans.

With regards to Woori's surprise decision not to redeem $400 million of debt, Lee said it was aimed at saving costs.

In current market conditions, Woori Bank may have to pay 1,000-basis-points over 6-month LIBOR (London Interbank Offered Rates) to issue new overseas bonds, well above 345 basis points plus 6-month LIBOR which the bank now has to pay for the junior-ranked debt.

But the bank is looking at measures to allay investors' concerns.

"We are discussing exchangeable bonds which offer higher rates (than the subordinated debt) with investment banks," Lee said.

($1=1,403.5 Won)

(Reporting by Kim Yeon-hee; Editing by Marie-France Han and Jacqueline Wong)