(Repeat for Additional Subscribers)
June 7 (Reuters) - (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 Ratings (IDR) at ‘A-'.
The Outlook is Stable. Fitch has also affirmed Woori’s Viability Rating (VR) at ‘bbb’. A full rating breakdown is provided below.
KEY RATING DRIVERS AND SENSTIVITIES - IDRs, Support Rating and Support Rating Floor Woori’s IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch’s continued belief of an extremely high propensity of the South Korean government (AA-/Stable) to support Woori, if required. This view is based on Woori’s systemic importance as one of the major commercial banks in South Korea and the government’s majority ownership through Korea Deposit Insurance Corporation (KDIC). Being the second-largest bank in Korea, Woori holds 13% and 15% of the banking system’s total assets and deposits respectively.
A substantial reduction of the government’s stake (or an M&A) may trigger a rating review for Woori’s state support-driven ratings. The government has attempted to sell Woori for a decade but has failed to do so.
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 ‘bbb’ VR reflects its strong local franchise, its adequate capitalisation and margins, and the sound ordinary support/supervision from Korea’s authorities. It also takes into account the bank’s weak risk management practices, which are not fully reflected in its headline loan quality metrics. Another key factor determining Woori’s VR is the bank’s structural weakness in its funding/liquidity profile, particularly in foreign currency.
Woori’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 (1.9% in 2012) adjusted for the credit card operation that was spun-off on 1 April 2013 is below than the system average (2.1%).
Its precautionary-and-below loans ratio (PBL; 4.7% at end-Q113) is noticeably weaker than the industry average (about 3.7%). The share of loans that are not backed by either collateral or guarantee (49% at end-2012) was worse than the system average (about 43%).
Woori faces some concentration risk arising from its lending to large corporates, particularly in view of the fact that many large companies have survived the global financial crisis on extensive government support. It loan book carries large exposures to weak property developers, shipbuilders and shipping companies.
Although somewhat volatile, Woori’s loans/customer deposits ratio has improved slightly in 2012 to 122%, compared with 126% at end-2011. Woori’s retail deposits/total deposits has improved to 34% at end-2012 from 31% at end-2008. 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 maturity debts, as per regulatory guidance.
Woori’s Fitch core capital ratio was further strengthened to 11.4% at end-Q113. Fitch expects Woori to meet the Basel III capital requirements without difficulties when they are implemented in Korea at end-2013. It is highly likely that Woori will be designated a “domestic systemically important bank” (D-SIB) in Korea by the regulator.
A substantial and sustainable improvement in its loan quality and risk management, or foreign currency funding/liquidity profile may offer upside potential for Woori’s VR.
A significant loan quality deterioration causing noticeable erosion in its capitalisation may cause a downgrade of its VR.
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 - Subordinated Debt and Hybrid securities The ‘BBB-’ rating for its legacy lower tier 2 subordinate debt is one notch below Woori’s VR, and reflects below-average loss severity (one notch) and minimal non-performance risk (no notch). 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 subordinate debt and hybrid ratings are likely to move in line with the VR of the bank.
KEY RATING DRIVERS AND SENSTIVITIES - National rating
Woori’s ‘AAA(tha)’ senior unsecured issue rating is the highest on Thailand’s National rating scale. The rating is likely to move in line with the bank’s IDR.
Woori’s ratings are as follows.
Long-Term Foreign Currency IDR affirmed at ‘A-'; Stable Outlook
Short-Term Foreign Currency IDR affirmed at ‘F2’
Viability Rating affirmed at ‘bbb’
Support Rating affirmed at ‘1’
Support Rating Floor affirmed at ‘A-’
Senior unsecured debt affirmed at ‘A-’
Subordinate debt affirmed at ‘BBB-’
Hybrid securities affirmed at ‘BB-’
Senior unsecured THB-denominated debt affirmed at ‘AAA(tha)'