RPT-Fitch affirms Korean key policy banks at 'AA-' and NongHyup Bank at 'A'

Wed Sep 4, 2013 4:58am EDT

Sept 4 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Korea Finance Corporation's (KoFC), Korea Development Bank's (KDB), Export-Import Bank of Korea's (KEXIM), and Industrial Bank of Korea's (IBK) Long-Term Foreign Currency Issuer Default Ratings (IDRs) at 'AA-'. The agency also affirmed NongHyup Bank's (NHB) Long-Term Foreign Currency IDR at 'A'. The Outlooks are all Stable. At the same time, Fitch has assigned KEXIM's EMTN programme a rating of 'AA-'.

KEY RATING DRIVERS - IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR (KoFC, KEXIM, KDB and IBK)

The IDRs of the key policy banks are equalised with South Korea's ratings to reflect the government's de-facto solvency guarantees and its controlling stake in them.

The Support Ratings of '1' and Support Rating Floors at 'AA-' reflect Fitch's expectations of an extremely high probability of government support. The government is legally obliged to cover the key policy banks' losses should the latter's capital reserve funds fail to do so, as per their respective establishing Acts (Article 31 of KoFC Act; Article 44 of KDB Act; Article 37 of KEXIM Act; and Article 43 of IBK Act).

KDB New York branch's CP programme has been affirmed at 'F1+', in line with KDB's Short-Term IDR.

Fitch believes that the capitalisation of KoFC, KDB and KEXIM is not as adequate as suggested by their headline capital adequacy ratios, given their heavy exposure to troubled shipbuilders, such as Korea's fourth-largest shipbuilder, the STX group, or to corporates in work-outs/restructuring. The agency is also of the view that the banks may require further capital from the government to shore up their capital should the outlook for struggling sectors (i.e. shipbuilding, shipping and construction industry) deteriorate further and expose them to additional provision.

RATING SENSITIVITIES - IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR (KoFC, KEXIM, KDB and IBK)

The ratings would be directly affected by changes to South Korea's or to the solvency guarantee contained within their respective establishing Acts. Fitch does not expect any significant change to either. However, KoFC's ratings may be reviewed if there are any material changes in the solvency language as a result of the government's plan to re-merge KoFC with KDB by July 2014.

The ratings of the key policy banks may be reviewed if the government does not provide capital support in a timely manner.

KEY RATING DRIVERS - IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR (NHB) NHB's IDR is based on extremely high potential state support, in case of need, and is at the Support Rating Floor (SRF) of 'A', which is higher than the SRF of commercial banks. This is because NHB carries out certain agricultural policy functions by paying a brand fee to its parent, National Agricultural Cooperative Federation (NACF), to support farmers and by extending loans to farmers, agriculture-related industries, co-operatives, and its affiliates However, the probability of support is lower than that of the key policy banks as NHB does not have any solvency guarantee from the government.

NHB is wholly owned by National Agricultural Cooperative Federation (NACF). NACF is owned by 1,164 individual cooperatives that, in turn, are owned by member famers. NHB was spun off from NACF on 2 March 2012 as part of NACF's restructuring exercise.

Fitch further notes that as part of the restructuring NongHyup Financial Holding (NHFH), a direct parent of NHB and a subsidiary of NACF, has yet to receive a capital injection of KRW1trn from the government as planned. NACF has instead issued KRW0.5trn local currency bonds with the government subsidising the interest expense in lieu of the capital injection.

NHB's headline capital adequacy ratios appeared sound based on the Fitch Core Capital (FCC) ratio of 12.7%, and a regulatory Tier 1 ratio of 11.4% at end-H113. However, Fitch believes that NHB's underlying figures are substantially lower given its exposure to troubled shipbuilders. Furthermore, NHB's internal capital generation ability is limited due to high brand fees and credit costs. NHB pays NACF around 0.2% of total assets as brand fee.

RATING SENSITIVITIES - IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR (NHB) Fitch will review the government's propensity to support NHB if NHB's policy role diminishes or if the planned capital injection by the government does not happen within Fitch's expected time horizon of 12 months. A reduction in the government's propensity to support NHB may also be evident in a diminishing of NHB's relationship with NACF or the government. Changes in the sovereign ratings could also trigger a rating review.

The rating actions are as follows:

KoFC

Long-term Foreign Currency IDR affirmed at 'AA-'; Outlook Stable

Short-term Foreign Currency IDR affirmed at 'F1+'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'AA-'

Senior unsecured debt and GMTN programme affirmed at 'AA-'

Short term debt and GMTN programme affirmed at 'F1+'

KEXIM

Long-term Foreign Currency IDR affirmed at 'AA-'; Outlook Stable

Short-term Foreign Currency IDR affirmed at 'F1+'

Long-term Local Currency IDR affirmed at 'AA'; Outlook Stable

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'AA-'

Senior unsecured affirmed at 'AA-'

EMTN programme rating assigned 'AA-'

Short term debt affirmed at 'F1+'

KDB

Long-term Foreign Currency IDR affirmed at 'AA-'; Outlook Stable

Short-term Foreign Currency IDR affirmed at 'F1+'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'AA-'

Senior unsecured debt and GMTN programme affirmed at 'AA-'

Short term debt, US CP programme and GMTN programme affirmed at 'F1+'

KDB New York branch

Commercial paper affirmed at 'F1+'

IBK

Long-term Foreign Currency IDR affirmed at 'AA-'; Outlook Stable

Short-term Foreign Currency IDR affirmed at 'F1+'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'AA-'

Senior unsecured debt affirmed at 'AA-'

Senior unsecured debt affirmed at 'AAA(tha)'

NHB

Long-term Foreign Currency IDR affirmed at 'A'; Outlook Stable

Short-term Foreign Currency IDR affirmed at 'F1'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A'

Senior unsecured debt and GMTN programme affirmed at 'A'

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