TEXT-S&P summary: Korea Finance Corp.
(The following statement was released by the rating agency)
Nov 27 -
Summary analysis -- Korea Finance Corp. --------------------------- 27-Nov-2012
CREDIT RATING: Country: Korea, Republic
Foreign currency A+/Stable/A-1 Primary SIC: Sovereign owned
Mult. CUSIP6: 50065T
Credit Rating History:
Local currency Foreign currency
13-Sep-2012 --/-- A+/A-1
08-Nov-2009 --/-- A/A-1
The ratings on Korea Finance Corp. (KoFC) reflect its critical public policy role and integral link with the government of Korea (foreign currency A+/Stable/A-1; local currency AA-/Stable/A-1+). The ratings also reflect the uncertain pace and direction of business development.
The ratings on KoFC are equalized with the long-term ratings on Korea, reflecting Standard & Poor's Ratings Services' opinion that there is an "almost certain" likelihood that the Korean government would provide timely and sufficient extraordinary support to KoFC in the event of financial distress. In accordance with our criteria for government-related entities, our rating approach is based on our view of KoFC's "critical" role as a primary public financial institution specialized in public policy financial intermediation and "integral" link with its sole owner, the Korean government.
The ratings incorporate strong direct support from the Korean government, including capital injections, provision of direct lending, and guarantees. The corporation is Korea's prime integrated public policy financial institution, and mandated to enhance the country's competitiveness and growth potential, facilitate job creation, support high-tech startups, and support the soundness of the financial system through its financial services.
In addition, the ratings reflect the government's legal obligation to maintain KoFC's solvency, based on the provision of article 31 of the KoFC Act. Standard & Poor's, however, regards this statutory obligation as only a sign of the government's commitment to support KoFC, rather than a direct guarantee of timely payment for all the corporation's obligations.
The Korean government, which is in the process of privatizing Korea Development Bank (KDB; A/Stable/A-1), split KDB into two organizations on Oct. 28, 2009: (1) KoFC, which continues to provide public policy finance; and (2) the remaining part of KDB, which operates as a profit-maximizing organization. The ownership of the latter was transferred to the 100% government-owned KDB Financial Group (KDBFG). With the transfer of government stakes and finalization of KDBFG's balance sheet, KoFC owned a 90.26% stake in KDBFG at the end of 2011, while the government retained the remaining 9.74%. In turn, KDBFG controls KDB, Daewoo Securities, KDB Capital, KDB Asset Management Company, and Korea Infrastructure Investments Asset Management Co. Ltd.
With the amendment of the KDB Act, KoFC is scheduled to divest its stake in KDBFG by May 2014, likely through an IPO, although the size and the schedule of the sale have not been finalized. In the meantime, the government will guarantee or provide equivalent measures for existing KDB bonds, including the Korean won-denominated industrial finance bonds that KoFC succeeded, to avoid investor demand for early redemption.
Assessing KoFC's stand-alone credit profile (SACP) is difficult at this stage, given its limited track record of business since establishment, its operations and balance sheet being fully based on its policy role, and the unknown scale of KDBFG's privatization. Given the privatization plans of KDBFG and KDB, one of the challenges KoFC faces in maintaining its stand-alone credit quality will be how to establish solid financial fundamentals of its own. For example, on a nonconsolidated basis, KoFC's large holdings of securities--which are mainly comprised of those of other government related entities including KDBFG--constrain its profitability since the return from those securities through interest and dividends does not meet the cost of funding and pressures the company's net interest margin. On a nonconsolidated basis, KoFC has been increasing its loan receivables balance since its establishment, which has contributed to ease this gap; the balance increased by 39% year on year from Dec. 2010 to 2011. Although the sale of KDBFG may proceed, its pace and size would affect the financial standing of KoFC, which will be an important driver to assess its SACP.
KoFC's liquidity is adequate. At the end of 2011, the corporation's cash and due from banks was 3.4% of borrowings on a nonconsolidated basis, and 5.1% of borrowings and customer deposits on a consolidated accounts basis, respectively. On a consolidated basis, KoFC's total equity was 13.6% of total assets and its total equity to total loan ratio was 28.4% at the end of 2011. KoFC recorded nonconsolidated and consolidated profits of Korean won (KRW) 554 billion and KRW 796 billion, respectively, in 2011. Given its strong ties with the Korean government, KoFC enjoys favorable access to capital markets.
The stable outlook reflects that on the rating on the Republic of Korea. We expect KoFC's public policy role to stay intact over the medium term, as the government remains engaged in active economic management. Nevertheless, in the unlikely scenario that KoFC's public policy role or link to the government were to diminish, such as if the government were to embrace a broader laissez-faire stance toward economic development, depending on the magnitude of such change, we would revise the ratings on KoFC accordingly.
Related Criteria And Research
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Rating Government-Related Entities: Methodology and Assumptions, Dec. 9, 2010