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June 2 (Reuters) - (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 list of rating actions is at the end of this commentary.
KEY RATING DRIVERS AND SENSITIVITIES - VR and IDRs
Shinhan's IDR mainly reflects its prudent risk appetite backed by a stable management team and strong capitalisation. It also takes into account the challenging operating environment, the bank's substantial domestic franchise, narrower 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 strong capitalisation and prudent risk management.
Fitch expects Shinhan's management team to remain stable thanks to its relatively strong corporate governance, which is underpinned by a group of Korean and Japanese individual shareholders that together hold 16%-18% of its parent Shinhan Financial Group. This allows Shinhan to consistently adhere to its long-term strategy.
Shinhan's precautionary-and-below loan ratio (2.0%) at end-2013 was better than the commercial bank average (about 2.9%). Its loan book mix is in line with the industry average. The share of loans that are not backed by either collateral or guarantee (41%) was also roughly in line with the system average (about 43%).
Shinhan's large corporate loan book is more concentrated than its local peers, although mostly in better quality names than the peers'. That said, the bank has a good track record of carefully restricting its exposure to problematic large corporates via good risk control.
Fitch does not expect Shinhan's underlying profitability to improve significantly in the foreseeable future due to low interest rates and continued social/political pressure on bank margins and fees. Fitch estimates Shinhan's ROA to be about 0.6%-0.7% in the next few years, compared with 0.6% in 2013.
Fitch expects Shinhan's capitalisation to remain very strong. Shinhan will be designated a "domestic systemically important bank" (D-SIB) in Korea by the regulator in 2016, which will require the bank to maintain a high level of capital. Fitch core capital (FCC) ratio has gradually improved to 14.1% at end-2013 from 13.6% at end-2010.
Shinhan's loans/customer deposits ratio improved at end-2013 to 115% from 119% at end-2012. This compared with the average among Korea's commercial banks of 119% at end-2013 and 124% at end-2012. Shinhan's retail deposits/total deposits improved to 40% at end-2013 from 34% at end-2009. 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 debt, in accordance with regulatory guidance.
A sustainable, significant improvement in its foreign-currency funding/liquidity profile could result in positive rating action on Shinhan's IDR and VR. However, such prospects are remote, considering the challenging operating 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 SENSITIVITIES - Support Rating and Support Rating Floor
Shinhan's '1' Support Rating and 'A-' Support Rating Floor reflect Fitch's continued belief that the South Korean government (AA-/Stable) has an extremely high propensity 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 SENSITIVITIES - 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 SENSITIVITIES - 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 their going-concern loss absorption features. The hybrid securities' rating is likely to move in line with the VR of the bank.
The full list of rating actions follows:
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-'