TEXT-Fitch Upgrades Standard Chartered Bank Korea to 'AA-'; Outlook Stable

Fri Feb 8, 2013 12:23am EST

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SEOUL/SINGAPORE, February 08 (Fitch) Fitch Ratings has upgraded Standard Chartered Bank Korea Limited's (SCBK) Long-Term Issuer Default Rating (IDR) to 'AA-' from 'A+'. The Outlook has been revised to Stable from Negative. A full rating breakdown is provided below.

Rating Action Rationale

The upgrade arises from the equalisation of the Korean subsidiary's IDR with that of the parent Standard Chartered Bank (SCB, AA-/Stable), reflecting Fitch's reassessment of the bank's linkage with its parent. Fitch now views SCBK as a core part of SC's international wholesale banking strategy.

Fitch believes SCB will be highly committed to retain its presence in South Korea as it plays an important role within SCB's extensive international network in spite of SCBK's recent downsizing in retail operations. SCBK accounted for 14% of the group's consolidated total loan book (28% of group's mortgage book) and 10% of operating income in H112.

The revision of Outlook to Stable was triggered by SCB's Outlook revision on 7 February 2013 (see related rating action commentary at www.fitchratings.com).

SCBK's Support rating of '1' reflects Fitch's continued belief of an extremely high propensity from its parent to support the bank on a timely basis, if needed, based on the parent's strong track record of support for SCBK. SCBK is wholly owned by SCB and shares the brand name since January 2011.

SCBK's VR reflects its strong capitalisation, sound loan quality, and strong ordinary support from its parent especially in foreign currency funding/liquidity and risk management. It also takes into account its concentration in mortgages - which is reducing - weak profitability and heavy reliance on wholesale funding.

Rating Drivers and Sensitivities - IDR and VR

SCBK's IDRs are sensitive to changes in SCB's IDRs and any weakening of SCB's ability or propensity to support SCBK will directly affect the subsidiary's IDRs. However, Fitch sees this prospect as remote in the foreseeable future, given SCBK's important role in SCB's international strategy. Fitch considers it unlikely that the group (including SCBK) would be upgraded in the medium term (see Fitch Revises Standard Chartered's Outlook to Stable; Affirms 'AA-' dated 7 February 2013 on www.fitchratings.com).

Upside potential for VR is limited given that most of the bank's credit metrics, except for capitalisation, are weakening. Downside risks may arise from a lack of fundamental improvement in the bank's funding structure or from a weakening of its domestic franchise. Restructuring its balance sheet has resulted in a reduction in mortgage loans which in turn was reflected in a lower deposit balance. Fitch estimates that since end-2010 SCBK's customer deposits to have declined by about 23% (sector average: about 12% increase) while its total loan book has shrunk 13%. Fitch will closely monitor developments surrounding the bank's funding structure and its domestic franchise and assess SCB's role and strategy in managing these aspects.

SCBK's profitability is weak with an annualised return on assets of 0.3% in 9M12 compared with the sector average of 0.6%, mainly due to high personnel costs, but partly also due to the size of its mortgage book. Fitch believes it would be challenging for the bank to reverse its weakening profitability in 2013-2014 due to low interest rates, gradually increasing credit costs and regulatory/social pressure to lower margins.

SCBK's loan quality is still sound with a precautionary-and-below loans (PBL) ratio of 2.7% at end-Q312 (sector average: about 3.7%). Fitch expects its PBL ratio to gradually deteriorate as households' debt-servicing ability weakens. The bank's household loans (including loans to self-employed individuals and credit-card receivables) accounted for 68% of its total loan book at end-Q312 (sector average: about 45%). However, associated risks are partly mitigated by SCBK's low average loan-to-value ratio of 45%.

SCBK's wholesale funding dependency is high with a 165% loans/customer deposits ratio (LDR) at end-Q312. Fitch estimates the ratio at end-2012 to have reduced to about 150% following the sale of certain mortgage assets in Q412. Nevertheless, it is still significantly higher than domestic commercial banks' average of about 125%. Moreover, it has been on a weakening trend since 2010 due to the decline in customer deposits.

Fitch expects SCBK's capitalisation to remain solid to absorb unexpected credit costs and to meet Basel III capital requirements without difficulty, despite its high dividend pay-out ratio (78% in 2011). SCBK's Fitch core capital ratio was 13.4% at end-Q312.

Hybrid Securities Rating Drivers and Sensitivities

SCBK's legacy hybrid tier 1 securities are rated four notches below its Long-Term IDR. These securities are generally notched two levels from the issuer's IDR to reflect deep subordination and that their non-performance risk would be neutralised by support from its parent. However, the securities' rating is capped at the 'BBB+' ratingof similar securities issued by SCBK's parent.

The rating actions are as follows:

Long-Term IDR upgraded to 'AA-' from 'A+'; Outlook Stable

Short-Term IDR upgraded to 'F1+' from 'F1'

Viability Rating affirmed at 'bbb+'

Support Rating affirmed at '1'

Hybrid securities affirmed at 'BBB+'

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