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June 7 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Korea-based Kookmin Bank's (Kookmin) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A'.
The Outlook is Stable. Fitch has also affirmed Kookmin's Viability Rating (VR) at 'a'. A full rating breakdown is provided below.
KEY RATING DRIVERS AND SENSTIVITIES - VR and IDRs
Kookmin's IDRs are driven by its VR which is underpinned by its substantial domestic retail franchise and strong capitalisation. The ratings also reflect its contracting margins, adequate loan quality, and below-average liquidity/funding profile by international standards (mitigated by ordinary support from local authorities).
The Stable Outlook reflects Fitch's continued expectation that Kookmin can withstand a reasonable level of financial stress and asset-quality deterioration, considering its capitalisation and retail-oriented operation.
Kookmin's long-term underlying profitability is weakening due to various regulatory-driven costs and continued social and political pressure on the margins and fees of Korean financial institutions. Net interest margin (NIM) has been contracting due to declining interest rates. That said, its regulatory NIM (2.2% in 2012) is slightly higher than the system average (2.1%) due to its strong low-cost base although its lending rate is lower as it focuses on mortgages.
Kookmin's precautionary-and-below loans ratio (PBL; 3.7%; system average: 3.7%) has increased since mid-2010. The share of loans that are not backed by either collateral or guarantee (35% at end-2012) was better than the system average (about 43%). Kookmin's loans to households and self-employed individuals, on aggregate, represent about 70% of its total loans. While it remains to be seen how Korea's weakening household debt servicing ability will affect Kookmin, Fitch does not think the country's household debt is a serious issue at this stage.
Regarding the so-called group loans (portfolio loans or bridge loans to a group of individuals without individual loan screening in a large scale property development) that has been the key factor for the rising delinquency rate, Fitch's base case scenario is that it would not result in real material losses to the bank given that the borrowers are intentionally delinquent to pressure their property developers.
Kookmin's loans/customer deposits ratio has improved slightly in 2012 to 122%, compared with 124% at end-2011. Its retail deposits/total deposits has improved further to 62% at end-2012 from 53% at end-2008. Like its local peers, Kookmin depends highly on foreign-currency wholesale funding; however, it has ensured that foreign-currency lending is funded by long-term maturity debts, as per regulatory guidance.
Kookmin's Fitch core capital ratio was further strengthened to 13.5% at end-Q113. Fitch expects Kookmin to meet the Basel III capital requirements without difficulties when they are implemented in Korea at end-2013. It is highly likely that Kookmin will be designated a "domestic systemically important bank" (D-SIB) in Korea by the regulator.
A sustainable, significant improvement in Kookmin's profitability, loan quality, and foreign-currency funding/liquidity profile may result in positive rating action. However, Fitch views such prospects as remote, considering the subdued business environment and the fact that Korean households are unlikely to own any foreign currency.
A downgrade of Kookmin's Viability Rating could be triggered by an increase in the bank's risk appetite, reflected in rapid loan growth and/or deteriorating loan quality, leading to erosion of its capitalisation. However, Fitch does not expect the quality of Kookmin's loans to households and self-employed individuals to weaken substantially in the foreseeable future. Any sizeable M&A activity by its parent, Kookmin Financial Group, may trigger a rating review for Kookmin.
KEY RATING DRIVERS AND SENSTIVITIES - Support Rating and Support Rating Floor Kookmin's '1' Support Rating and 'A-' Support Rating Floor reflect the agency's continued belief of an extremely high propensity of the South Korean government (AA-/Stable) to support the bank, if required. This view is based on the bank's systemic importance as the largest commercial bank in South Korea, holding 14% and 17% of the banking system's total assets and deposits respectively.
A change in the ability of the Korean authorities to provide support may result in a change in these ratings. Global regulatory initiatives aimed at reducing implicit government support available to banks may cause downward pressure on the ratings.
KEY RATING DRIVERS AND SENSTIVITIES - Senior Unsecured Debt
The rating of senior unsecured debt is aligned with the bank's Long-Term IDR. Any change in the IDR will be reflected in the rating of the debt.
Kookmin's ratings are:
Long-Term Foreign-Currency IDR affirmed at 'A'; Stable Outlook
Short-Term Foreign-Currency IDR affirmed at 'F1'
Viability Rating affirmed at 'a'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Senior unsecured debt affirmed at 'A'