TEXT-Fitch Affirms Korea Exchange Bank at IDR 'A-'; Outlook Stable

Fri Nov 16, 2012 12:12am EST

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(The following was released by the rating agency)

SEOUL/HONG KONG, November 16 (Fitch) Fitch Ratings has affirmed Korea Exchange Bank's (KEB) Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Fitch has also affirmed KEB's Viability Rating (VR) at 'bbb+'. A full rating breakdown is provided below.

The affirmation of KEB's IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflects Fitch's continued belief of an extremely high propensity of the South Korean government ('AA-'/Stable) to support KEB, if needed. KEB is one of the main commercial banks in South Korea. KEB holds 6% of the system's total assets and facilitates about 30% of the nation's trade finance.

KEB's 'bbb+' VR is underpinned by its strong capitalisation and solid franchise, especially in providing trade finance and foreign exchange services to importers, exporters and retail customers.

The VR also takes into account its concentration risks in large corporate loans, a structural weakness in its funding/liquidity profile - an issue common to the system. The VR also reflects the bank's aggressive loan growth strategy after it was acquired by Hana Financial Group (HFG) in February 2012. Its loan portfolio has grown very rapidly at about 3% per quarter since the acquisition.

Fitch expects that most of KEB's financial metrics would deteriorate quickly if such an aggressive growth is continued for several more quarters causing downward pressure on the VR. KEB's loan quality was sound with a precautionary-and-below loan (PBL) ratio of 2.7% at end-Q312, compared with about 3.7% for the industry average. However, KEB's concentration risk remains the primary risk. The share of large corporate loans has substantially increased to 45% of its totals loans at end-H112 from 37% at end-H111.

However the increase was in part due to reclassifications of the loans to successful SMEs that have become large corporates. Fitch anticipates KEB's profitability to fall slightly below its local peer average over the medium term especially if its credit card operation is spun off. Its regulatory net interest margin (2.4%) in 9M12 was higher than the industry average (2.1%) thanks to its credit card operation which accounted for 20% of the margin. Like other banks in Korea, KEB continues to face political and social pressure on profitability. KEB's loans/customer deposit ratio was high at 120% at end-H112.

Fitch expects KEB to face some challenges in meeting Basel III liquidity and funding requirements given its aggressive asset growth strategy. KEB depends highly on foreign-currency wholesale funding, like its local peers; however it has ensured that foreign-currency lending is funded by long-term debt, as per regulatory guidance.

KEB's capitalisation is strong with a Fitch core capital ratio of 13.0% at end-Q312. It has declined by 1.1pp since end-Q112 due to strong loan growth. Fitch expects KEB's capitalisation to continue to deteriorate as it focuses on asset growth strategy. Fitch expects no change in the support driven IDRs unless there is a material change in South Korea government's ability or propensity to support KEB.

A complete acquisition of KEB's stake by HFG (currently 60% stake) or full scale integration with Hana Bank may trigger a review for KEB's ratings.

KEB's VR is likely to be downgraded if its aggressive loan growth strategy leads to a significant deterioration in its capitalisation and structural funding profile. Upside potential for the VR is limited given most of its financial metrics are in weakening trends.

The rating actions are as follows:

Long-Term IDR affirmed at 'A-'; Outlook Stable

Short-Term IDR affirmed at 'F2'

Viability Rating affirmed at 'bbb+'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A-'

Senior unsecured debt affirmed at 'A-'

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