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Sept 11 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Korea Housing Finance Corporation's (KHFC) Long-Term Rating at 'AA-' and Short-Term Rating at 'F1+'. The Outlook on the Long-Term Rating is Stable.
KEY RATING DRIVERS
KHFC's ratings are linked to the ratings of Korea (AA-/Stable/F1+) due to its public sector status and a strong probability of extraordinary government support, in case of need. Fitch has classified KHFC as a dependent public sector entity. The company's strategic policy is dictated by and closely monitored by the government of Korea. Fitch has applied a top-down approach in its analysis of KHFC.
KHFC has a mandate to facilitate access to housing finance for low- and middle-income earners in South Korea. Recent government policy requiring Korean financial institutions to raise fixed-rate amortising mortgage loans to 30% of their outstanding portfolios by end-2016 enhances KHFC's policy role. It is widely expected to take a leading role in providing funding to achieve this target.
Wholly owned by the state, KHFC is closely controlled and supervised by the government. It reports to Ministry of Strategy and Finance and is supervised by Korea's financial regulator, the Financial Services Commission (FSC). Its president is appointed by the government and works as a public servant attached to the FSC. Its auditor is also recommended and appointed by the government.
Under Article 51 of the KHFC Act, the state government is required to replenish the entity's deficits when KHFC's own reserves are not sufficient to absorb losses. State support is also evidenced by the government's capital injection in 2012 and 2013, which helps the entity to meet its regulatory required capital adequacy ratio of 8%.
As a frequent issuer, KHFC's strong liquidity and funding status is backed by its strong reputation in both the domestic and international capital market. Its funding channels are also well-diversified, including mortgage-backed securitisation, covered bonds, senior unsecured bonds, and commercial papers.
KHFC suffers from funding mismatch as the loan portfolio has maturities ranging from 10 to 30 years but is funded by commercial paper and bonds with relatively short tenor. Nevertheless, the mismatch is partly mitigated by the entity's continuing securitisation of its mortgage loan portfolio and shorter effective mortgage tenor (generally seven to eight years) due to Koreans' tendency for early loan repayment.
Although KHFC's loan mortgage demand was slightly subdued in 2012 following strong growth in previous years, it still achieved 8.1% yoy growth due to KHFC's more competitive fixed-rate mortgage loans than those offered by other Korean financial institutions. Loan receivables are forecast by KHFC to grow at 5%-10% p.a. in the next two years.
Fitch expects KHFC's profitability remain modest due to its policy role and vulnerability to asset-liability mismatch and interest rate volatility. Its loan delinquency ratio was 0.66% in 2012. Fitch expects government capital injection would be forthcoming should KHFC's capital adequacy, which stood at 9.5% at end-2012, come under pressure.
A positive rating action on the sovereign, in conjunction with continued strong support from the state, would result in a similar change in KHFC's rating.
A downgrade of Korea, significant changes leading to a dilution in state ownership and state control, or weakening in KHFC's links with the government, including the importance of the entity's public policy role and budgeting relationship, could trigger a downgrade. This is because KHFC, under such circumstances, would no longer be classified as a dependent public-sector entity and, therefore, no longer be credit-linked to the sovereign rating.