RPT-Fitch affirms Shinhan Card at 'A-'/stable
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June 7 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Korea-based Shinhan Card Co's (SHC) Long- and Short-Term Issuer Default Ratings (IDRs) at 'A-' and 'F2'. The Outlook is Stable. Fitch has also affirmed SHC's Support Rating at '1'.
Key Rating Drivers
The affirmation of SHC's ratings reflect Fitch's continued belief of an extremely high probability of support for SHC from its sole owner, Shinhan Financial Group (SFG). SFG is South Korea's third-largest financial group by total assets (KRW300trn at end-2012), and Shinhan Bank (SHB, 'A'/Stable) is its flagship subsidiary.
However, SFG itself does not have a very strong ability on a stand-alone basis (with a high common-equity double leverage ratio of 137% at end-Q113) to support SHC. So, Fitch takes into account potential support from SHB for the card company.
SHC is very important to the group's strategy and core commercial banking operations. Although it accounts for just 7% of the group's consolidated total assets, SHC contributes 25%-30% of SFG's net profit. Moreover, SHC has a slightly larger customer base than SHB and thus contributes significantly to the group's franchise.
With a 21% share of total credit card transactions in 2012, SHC is the largest player in South Korea. It has over 15 million cardholders and they represent about 90% of South Korea's pool of potential credit card customers.
Fitch expects the profitability of Korea's credit card operators, including SHC, to weaken significantly in the medium term. A new scheme on the interest rates charged on loan products that might be introduced in late 2013 will further reduce profitability which was cut by about 15% due to the new merchant fee rule introduced in 2012. Its operating return on assets was 3.9% (exclusive of one-off gains) in 2012.
SHC has been prudent in lending, particularly since the global credit crisis in 2008. Risky assets (cash advances, card loans and revolving loans) as a share of SHC's total credit card receivables have declined by 6pp over the four years to end-2012. Like its peers, its precautionary-and-below loans have doubled in Q412 due to the new regulatory guideline on the risky revolving-facility borrowers. Fitch expects the quality of SHC's receivables to continue to deteriorate due to the increasing use of debit/cheque cards and the weakening debt-servicing ability of South Korean households amid rising household debt and a slowing economy. At end-2012, SHC's delinquency (one-month overdue) rate was 2.6% (system-wide: 1.9%).
Due to the sizable credit-purchase receivables that are collected within a few months and to the increasing demand for the long-term papers from the local pension funds, SHC and its local peers have benefited adequate liquidity.
That said, SHC's completely wholesale-based funding profile is vulnerable to capital market volatility and deterioration in consumer debt-servicing capability. However, SHC's debt maturity was reasonably well spread (28% in less than a year, 23% in one to two years, 27% in two to three years, and the remaining 22% over three years) with an average maturity of two years at end-2012. SHC benefits from liquidity support from the group and SHB.
SHC had a tangible common equity ratio of 25% at 2012. Given that SHC is SFG's main source of cash generation, Fitch expects SHC's dividend payout ratio to remain high, at 50%-60%. Fitch expects SHC to maintain its strong capitalisation
Any change to SHB's ratings would directly affect the credit card company's ratings.
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