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June 7 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Korea-based Shinhan Bank's (Shinhan) Long-Term Issuer Default Rating (IDR) at 'A'. The Outlook is Stable. Fitch has also affirmed Shinhan's Viability Rating (VR) at 'a'. A full rating breakdown is provided below.
KEY RATING DRIVERS AND SENSTIVITIES - VR and IDRs
Shinhan's IDR mainly reflects its substantial domestic franchise and strong capitalisation. It also takes into account the bank's variable margins, sound loan quality, and like the rest of the Korean banking system, its below-average liquidity/funding profile by international standards.
The Stable Outlook reflects Fitch's continued expectation that Shinhan can absorb a reasonable level of credit costs and financial stress considering its capitalisation and prudent risk management.
Shinhan's long-term underlying profitability is weakening due to various regulatory-driven costs and continued social and political pressure on the margins and fees of Korean financial institutions. Net interest margin (NIM) has been contracting due to declining interest rates. That said, its regulatory NIM (2.0% in 2012) is slightly below the system average (2.1%) reflecting its focus on higher quality customers, especially in SME corporate sector, than its peers. Its precautionary-and-below loan ratio (2.4%) at end-Q113 was noticeably better than the system average (about 3.7%). Its loan book mix is mostly in line with the industry average. The share of loans (41%) that are not backed by either collateral or guarantee was also in line with the system average (about 43%).
Leveraging its good risk management, the bank has historically been careful to restrict its exposure to problematic large corporates.
Shinhan's loans/customer deposits ratio has deteriorated slightly in 2012 to 119%, compared with 117% at end-2011. That said, it continued to remain below Korea's commercial banks average (124% at end-2012). Shinhan's retail deposits/total deposits has gradually improved to 38% at end-2012 from 34% at end-2008. Like its local peers, Shinhan depends highly on foreign-currency wholesale funding; however, it has ensured that foreign-currency lending is funded by long-term maturity debts, as per regulatory guidance.
Shinhan's Fitch core capital ratio was 13.6% at end-Q113. Fitch expects Shinhan to meet the Basel III capital requirements without difficulties when they are implemented in Korea at end-2013. It is highly likely that Shinhan will be designated a "domestic systemically important bank" (D-SIB) in Korea by the regulator.
Fitch expects Shinhan's management team to remain stable thanks to its relatively strong corporate governance underpinned by a group of Korean-Japanese individual shareholders that have 16-18% of stake in its parent Shinhan Financial Group, allowing it to deliver a long-term strategy consistently. Many of its local peers have seen significant changes in their management team following the new administration installed in February 2013.
A sustainable, significant improvement in its foreign-currency funding/liquidity profile could result in positive rating action on Shinhan's IDR and VR. However, Fitch views such prospects as remote, considering the subdued business environment and the bank's negligible foreign-currency retail deposits.
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 erosion of its capitalisation. However, Fitch does not expect the quality of Shinhan's loans to weaken substantially in the foreseeable future.
KEY RATING DRIVERS AND SENSTIVITIES - Support Rating and Support Rating Floor Shinhan's '1' Support Rating and 'A-' Support Rating Floor reflect Fitch's continued belief of an extremely high propensity of the South Korean government (AA-/Stable) to support the bank, if required. This view is based on the bank's systemic importance as one of the largest commercial banks in South Korea, holding 13% and 15% of the banking system's total assets and deposits respectively.
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.
KEY RATING DRIVERS AND SENSTIVITIES - Senior Unsecured Debt
The rating of 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 SENSTIVITIES - Hybrid securities
The 'BBB-' rating for Shinhan's hybrid securities is four notches below the bank's VR, in line with Fitch's criteria, to reflect their high loss severity (two notches) and non-performance risk (two notches). These tier 1 capital securities have limited flexibility over coupon payments despite its going-concern loss absorption features. The hybrid rating is likely to move in line with the VR of the bank.
Shinhan's ratings are:
Long-Term IDR affirmed at 'A'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'a'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Senior unsecured debt affirmed at 'A'
Hybrid securities affirmed at 'BBB-'