Fitch Places Busan Bank's Ratings on Negative Watch

Fri Jan 10, 2014 9:32am EST

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(The following statement was released by the rating agency) SINGAPORE/SEOUL, January 10 (Fitch) Fitch Ratings has today placed Korea-based Busan Bank's Long-Term and Short-Term Issuer Default Ratings (IDR), Viability Rating (VR) and outstanding debt ratings on Rating Watch Negative (RWN). The agency has simultaneously affirmed Busan Bank's Support Rating (SR) at '1' and Support Rating Floor (SRF) at 'BBB'. A full rating breakdown is provided below. KEY RATING DRIVERS - VR and IDRs The rating actions were triggered by the announcement that Busan Bank's parent, BS Financial Group (BSFG), has become the preferred bidder to acquire the South Korean government's stake (57%) in Kyongnam Bank (KNB) in late December 2013. KNB, a regional bank in Kyongnam province adjacent to Busan, is wholly owned by Woori Financial Holdings (Woori, BBB+/Stable). Woori is 57% owned by the government through Korea Deposit Insurance Corporation (KDIC). Busan Bank's rating is on RWN because the acquisition is relatively sizable for BSFG and has potential to significantly reduce Busan Bank's capitalisation and increase BSFG's double leverage while the detail funding plan by BSFG is not finalised. Fitch expects the acquisition to cost about KRW1.2trn. Busan Bank is 1.3x bigger than KNB in terms of total assets. Moreover, both Busan Bank and KNB in recent years have undertaken aggressive loan growth. Busan Bank's loan book grew by 54% over the last five years and KNB's by 68%, compared with the Korean commercial bank average of 8% for the same period. Fitch believes such growth is somewhat excessive even though the southeast region of Korea, where both Busan Bank and KNB operate, has experienced relatively higher economic growth. Fitch expects to resolve the Rating Watch Negative once the acquisition is completed and the details of the funding structure and its impact on Busan Bank's capitalisation become clear. This is expected to be in April 2014 when BSFG will sign a share purchase agreement. The schedule might be postponed due to the local election on 4 June 2014 and political issues. Fitch believes that the sizeable tax bill that Woori would incur when it spins off KNB to facilitate the sale would not stop the government from selling KNB. This is because the government is the majority shareholder of Woori and is strongly motivated to sell Woori's operating entities, including KNB, to raise funds for its welfare initiatives. RATING SENSITIVITIES - VR and IDRs Negative rating action on Busan Bank's VR and IDRs could result from the significant deterioration in its capitalisation if it has to pay out excessive dividends to BSFG and if BSFG's common equity double leverage ratio increases to well above 120%. Continued aggressive loan growth by Busan Bank or a significant credit profile weakening at KNB may trigger a downgrade of Busan Bank's VR and IDRs. Conversely, ratings could remain unchanged if BSFG raises enough common equity capital for the acquisition without damaging Busan Bank's capitalisation. KEY RATING DRIVERS - SR and SRF Busan Bank's '2' Support Rating (SR) and 'BBB' Support Rating Floor (SRF) were affirmed, given that BSFG will not merge Busan Bank with KNB for the foreseeable future after the acquisition and they will maintain their respective banks' names. Busan Bank's SR and SRF reflect Fitch's belief the South Korean government (AA-/Stable) has high propensity to support the bank, if required. This view is based on the bank's domestic importance given Busan Bank's focus on export-oriented SMEs in Busan. RATING SENSITIVITIES - SR and SRF The integration of Busan Bank with KNB may trigger a review of Busan Bank's SR and SRF - currently a remote prospect. Global regulatory initiatives aimed at reducing implicit government support available to banks may cause rating review. A change in the ability or propensity of the Korean authorities to provide support may result in a change in these ratings. KEY RATING DRIVERS and RATING SENSITIVITIES - Senior unsecured securities The rating on Busan Bank's 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. KEY RATING DRIVERS and RATING SENSITIVITIES - Subordinated securities The 'BBB' rating for Busan Bank's lower Tier 2 subordinated securities is one notch below the bank's VR, in line with Fitch's criteria, to reflect their high loss severity and non-performance risk. A change in BSB's VR will directly affect the rating of these securities. The rating actions are as follows: Long-Term IDR 'BBB+'; on RWN Short-Term IDR 'F2'; on RWN Viability Rating 'bbb+'; on RWN Support Rating affirmed at '2' Support Rating Floor affirmed at 'BBB' Senior unsecured debt 'BBB+'; on RWN Subordinated securities 'BBB'; on RWN Contact: Primary Analyst Mihwa Park Associate Director +65 6796 7238 Fitch Ratings Singapore PTE Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Heakyu Chang Director +82 2 3278 8363 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria "Global Financial Institutions Rating Criteria", dated 15 August 2012, and "Assessing and Rating Bank Subordinated and Hybrid Securities", dated 5 December 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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