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June 2 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Korea-based Shinhan Card Co's (SHC) Long-Term Issuer Default Ratings (IDRs) at 'A-' and Support Rating at '1'. The Outlook is Stable. Fitch has simultaneously affirmed SHC's Short-Term IDR at 'F2'.
KEY RATING DRIVERS
The affirmation of SHC's ratings reflects Fitch's continued belief there is an extremely high probability of support for SHC from its sole owner, Shinhan Financial Group (SFG). SFG is South Korea's third-largest financial group by total assets (KRW311trn at end-2013), and Shinhan Bank (SHB; A/Stable) is its flagship subsidiary.
However, SFG does not have very strong ability on a stand-alone basis (with a high common-equity double leverage ratio of 137% at end 2013) to support SHC. So, Fitch takes into account potential support from SHB for the card company, particularly, in the worst case scenario.
SHC is very important to the group's strategy and core commercial banking operations. Although it accounts for just 7% of the group's consolidated total assets, SHC contributes 25%-30% of SFG's net profit. SHC has a slightly larger customer base than SHB and thus contributes significantly to the group's franchise. SHC is the largest credit card company in South Korea with a 21% share of total transactions in 2013. SHC and SHB complement each other, especially in originating new customers and cross-sales of settlement bank accounts and new credit cards.
Fitch expects the profitability of Korea's credit card operators, including SHC, to weaken for the next few years. Its operating return on assets has declined to 3.4% in 2013 from 4.9% in 2010. Increasing consumer protection in Korea continues to put significant pressure on the industry's margins. Moreover, profitability would be squeezed due to increased funding cost when interest rates rise.
Fitch expects the overall quality of SHC's receivables to gradually deteriorate in the medium to long term due to the increasing use of debit/cheque cards and the weakening ability of South Korean households to service debt due to rising household debt and a slowing economy. SHC's delinquency (one-month overdue) rate was 2.2% at end-2013 compared with a system-wide rate of 1.8%.
SHC's completely wholesale-based funding profile is vulnerable to capital market volatility and deterioration in consumer debt-servicing ability. However, SHC's debt maturity is reasonably well spread out, with an average maturity of two years at end-2013. SHC benefits from liquidity support from the group and SHB. SHC and its local peers also benefit from ample liquidity due to increasing demand for long-term local paper from local pension funds.
Fitch expects SHC to maintain its strong capitalisation. SHC had a tangible common equity ratio of 28% at 2013. Given SHC is SFG's main cash generator and it has no significant asset growth potential, Fitch expects SHC's dividend payout ratio to remain very high.
Any change to SHB's ratings would directly affect the credit card company's ratings.