TEXT-S&P ratings on KDB affirmed At 'A/A-1'; SACP lowered to 'bb+'
(The following statement was released by the rating agency)
Apr 16 - Standard & Poor's Ratings Services today affirmed its 'A' foreign-currency long-term counterparty credit and senior unsecured issue ratings on Korea Development Bank (KDB). In addition, we affirmed the 'A-1' short-term rating on the bank. At the same time, we lowered KDB's stand-alone credit profile (SACP) to 'bb+' from 'bbb-',reflecting weaker capitalization mainly due to higher-than-expected credit growth. The outlook on KDB is negative.
Our downward revision of the SACP reflects a change in our assessment of KDB's capital and earnings to "adequate" from "strong." We expect KDB's risk-adjusted capital (RAC) ratio before diversification and concentration adjustments to be 8% to 9% in the next 18 months. We estimate that KDB's 2011 RAC ratio will fall below our expectation of above 10% mainly on greater-than-expected credit growth. We believe the RAC ratio will likely remain under pressure in the next few years considering the bank's business expansion.
Despite our downward revision of the bank's SACP, we affirmed our ratings on KDB as we still hold the view that there is an "extremely high" likelihood that the government of Korea (foreign currency A/Stable/A-1; local currency A+/Stable/A-1) would provide timely and sufficient extraordinary support to KDB in the event of financial distress. In accordance with our criteria for government-related entities, our rating approach is based on our view of KDB's "critical" role for, and "very strong" link with, the Korean government. We believe that KDB will closely collaborate with and provide support to Korea Finance Corp.'s (KoFC: foreign currency A/Stable/A-1) policy banking function for the foreseeable future. (KoFC was spun off from KDB in 2009 as part of the government's measures to privatize KDB. Following the spin-off, KoFC continues to provide public policy financing.) We hold this view because KDB is larger than KoFC and it has the policy banking know-how to ensure a smooth policy role transfer until KoFC can sufficiently carry out its policy role. Currently, KDB is ultimately 100% owned by the Korean government through KDB Financial Group (not rated), the holding company of KDB and KoFC.
The outlook on KDB's long-term counterparty credit rating is negative, reflecting the risk of a lower likelihood of government support once privatization proceeds. Privatization is a key risk factor, and we note that there has been some significant developments related to privatization, such as a potential initial public offering through the sale of some of KDB Financial Group's existing shares. The privatization of KDB could negatively impact the ratings on the bank because expected government support would weaken.
The ratings on KDB could come under downward pressure if KoFC runs its policy role independently, thereby reducing KDB's critical policy role, or if the government's ownership of KDB meaningfully changes, indicating possible significant changes in KDB's linkage with or its importance to the government. We could also lower the ratings on KDB if it significantly expands its commercial business lines, suggesting a weakening policy role. On the other hand, we could revise the outlook to stable if privatization risk is significantly reduced due to measures by the government such as abolishing or significantly delaying the privatization plan. This, however, is unlikely in our /s3wview.
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