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June 2 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Korea-based Woori Bank's (Woori) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Fitch has also affirmed Woori'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
Woori'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 Woori, if required. This view is based on Woori's systemic importance as the second-largest bank in Korea, with 13% and 15% of the banking system's total assets and deposits respectively, and the government's majority ownership of the bank through Korea Deposit Insurance Corporation (KDIC).
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.
Woori'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 Fitch criteria and reflects Fitch's typical approach to take the higher of the two possible IDRs, where the issuer (Woori) is rated lower than the supporting entity (the South Korean government).
KEY RATING DRIVERS AND SENSITIVITIES - VR
Woori's 'bbb' VR reflects its strong local franchise, its adequate capitalisation and margins, and the sound ordinary support and supervision from Korea's authorities despite the challenging operating environment. It also takes into account the bank's weak management quality and risk control. Another key factor determining Woori's VR is the bank's structural weakness in its funding/liquidity profile, particularly in foreign currency.
Its precautionary-and-below loans ratio (4.5% at end-2013) is significantly worse than the commercial bank average (about 2.9%). Moreover, the share of loans that are not backed by either collateral or guarantee (49%) was worse than the system average (about 43%). Its loan book still carries large exposures to weak property developers, shipbuilders and shipping companies.
Woori's long-term underlying profitability has weakened due to various regulatory-driven costs and continued social and political pressure on the margins and fees of Korean financial institutions. Fitch expects Woori's ROA to be 0.3%-0.4% for the next few years, assuming credit costs gradually improve. This compares with 0.2% in 2013.
Fitch expects Woori's Fitch core capital (FCC) ratio to remain adequate given that the bank is highly likely to 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. Its merger with its parent Woori Financial Holdings, scheduled in early 2015 under the government's plan to sell its shares in Woori and its parent to form a new Woori Bank, will likely result in a 210bp drop in Woori's FCC ratio (12.1% at end-2013).
Although somewhat volatile, Woori's loans/customer deposits ratio improved to 118% at end-2013, in part due to the spin-off its credit card operation in 2Q13, compared with 126% at end-2011. Woori's retail deposits/total deposits ratio rose to 37% at end-2013 from 31% at end-2009. Like its local peers, Woori depends highly on foreign-currency wholesale funding; however, it has ensured that foreign-currency lending is funded by long-term debts in accordance with regulatory guidance.
A noticeable improvement in its risk control or in management quality may offer upside potential for Woori's VR.
A significant deterioration in loan quality resulting in noticeable erosion in its capitalisation may cause a downgrade of its VR.
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 - Subordinated Debt and Hybrid Securities
The 'BBB-' rating for its legacy Lower Tier 2 subordinated debt is one notch below Woori's VR, and reflects below-average loss severity (one notch) and minimal non-performance risk. The securities have gone-concern loss absorption features and no coupon payment flexibility.
The 'BB-' rating for Woori'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). The legacy hybrid Tier 1 capital securities have limited flexibility over coupon payments despite its going-concern loss absorption features.
The ratings on the subordinated debt and hybrid securities are likely to move in line with the VR of the bank.
KEY RATING DRIVERS AND SENSITIVITIES - National Rating
The 'AAA(tha)' rating on Woori's Thai baht-denominated senior unsecured debt is at the highest end on Thailand's National rating scale. Therefore, there is no upside. The debt rating could be downgraded if Woori's Long-Term Foreign Currency IDR is downgraded below Thailand's Long-Term Local Currency IDR. Alternatively, an upgrade of Thailand's Long-Term Local Currency IDR may also lead to Woori's debt being downgraded.
The full list of rating actions follows:
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-'
Subordinated debt affirmed at 'BBB-'
Hybrid securities affirmed at 'BB-'
Senior unsecured THB-denominated debt affirmed at 'AAA(tha)'