July 31, 2014 / 5:21 AM / 3 years ago

Fitch Affirms Korea Exchange Bank at 'A-'/Stable

(The following statement was released by the rating agency) SEOUL/HONG KONG, July 31 (Fitch) Fitch Ratings has affirmed Korea Exchange Bank's (KEB) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Fitch has also affirmed KEB's Viability Rating (VR) at 'bbb+' and upgraded its Short-Term Foreign Currency IDR to 'F1' from 'F2'. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS AND SENSITIVITIES - IDRs, Support Rating and Support Rating Floor KEB's IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's continued belief that the South Korean government (AA-/Stable) has an extremely high propensity to support KEB, if required. This view is based on KEB's systemic importance as a key commercial bank in Korea, with 6% of the industry's total assets and deposits and, more importantly, about 30% of the nation's trade finance due to its entrenched foreign-currency clearing system. The Stable Outlook reflects the sovereign's Outlook. 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. KEB's 'A-' Long-Term Foreign Currency IDR may correspond to a Short-Term Foreign Currency IDR of either 'F1' or 'F2'. The upgrade of the Short-Term IDR to 'F1' is in line with a recent revision in Fitch's criteria for rating financial institutions and reflects Fitch's typical approach to take the higher of the two possible IDRs, where the issuer (KEB) is rated lower than the supporting entity (the South Korean government). KEY RATING DRIVERS AND SENSITIVITIES - VR KEB's 'bbb+' VR reflects its solid company profile, backed by its dominant market position in in foreign-currency operation and the sound supervision by and ordinary support from Korea's authorities despite the challenging operating environment. The VR also takes into account adequate overall financial metrics - although they have moderated in recent years - moderate management quality and more aggressive risk appetite after coming under the control of Hana Financial Group (HFG). KEB's precautionary-and-below loans ratio (2.7% at end-2013) is was slightly better than the local commercial banks' average (2.9%). However, KEB's loan book has a large corporate loan concentration at 48% of total loans, and these corporate loans which are typically unsecured. KEB has focused on growth in the mass SME market since its acquisition by HFG in February 2012, deviating from its traditional focus on successful exporters and importers, in part to mitigate its concentration on large corporates. KEB's long-term underlying profitability has weakened due to low interest rates and various regulatory-driven costs and continued social and political pressure on the margins and fees of Korean financial institutions. Fitch expects KEB's ROA to be 0.4% in 2014, excluding one-off gains (about KRW110bn in 1H14). Its net interest margin will decline by about 20% if and when its credit card operation is spun-off in late this year. Fitch expects KEB's Fitch core capital (FCC) ratio (12.5% at end-1H14) to remain adequate given that the bank is highly likely to be designated a domestic systemically important bank in Korea by the regulator in 2016, which will require the bank to maintain a high level of capital. KEB's loans/customer deposits ratio has been at around 115%-120% while the local commercial bank average has improved to 119% at end-2013 from 132% at end-2009. Moreover, unlike its peers, KEB has not focused on increasing its retail deposits much. The management of KEB and its wholly owning parent HFG is quite stable and most of its executive managers are internally promoted. However, in Fitch's view, HFG's management often sets challenging targets with short implementation time frames, which have exposed vulnerabilities in its operational risk controls. HFG has improved its operational risk controls, but there is room for further improvement. Fitch continues to believe any significant synergy in the short term from KEB's integration with Hana Bank is unlikely. The agreement between HFG and KEB's labour unions to keep KEB with autonomous management until February 2017 has effectively stalled HFG's repeated attempts to integrate, for example, the two banks' IT systems. That said, in the longer-term the combination of the two businesses would be positive from an overall company profile and franchise perspective. Material progress in the integration with Hana Bank may trigger a review of KEB's VR. The potential of positive rating action on KEB's VR is limited given KEB's weakening financial profile. Negative rating action on the bank's VR could result from an increase in risk appetite, including rapid growth or weakened loan quality, leading to significant erosion of its capitalisation. However, Fitch does not expect the quality of KEB's loans to weaken substantially in the foreseeable future. KEY RATING DRIVERS AND SENSITIVITIES - Senior Unsecured Debt The rating on the senior unsecured debt is aligned with the bank's Long-Term IDR. Any change in the IDR will be reflected in the rating on the debt. The full list of rating actions follows: KEB Long-Term Foreign Currency IDR affirmed at 'A-'; Stable Outlook Short-Term Foreign Currency IDR upgraded to 'F1' from 'F2' Viability Rating affirmed at 'bbb+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A-' Senior unsecured debt affirmed at 'A-' Contacts: Primary Analyst Heakyu Chang Director +82 2 3278 8363 Fitch Australia Pty Ltd, Korea Branch 9F, 97 Uisadang dae-ro Youngdeungpo-gu Seoul 150-737 Korea Secondary Analyst Jonathan Cornish Managing Director +852 2263 9901 Committee Chairperson Tim Roche Senior Director +61 2 8256 0310 Media Relations: 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 31 January 2014 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria 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 FREE WEB SITE AT 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. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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