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March 26 (The following statement was released by the rating agency)
Fitch Ratings has published Korea-based Hana Bank's (Hana) Long-Term Foreign Currency Issuer Default Rating (IDR) of 'A-' with Stable Outlook and assigned Short-Term Foreign Currency IDR of 'F1' and Viability Rating of 'bbb+'. A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS - IDRs, SR, and SRF
Hana's IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's belief of an extremely high probability of extraordinary support from the South Korean government (AA-/Stable), if needed. This view is based on Hana's systemic importance as one of the major commercial banks in South Korea.
Hana holds 8.3% and 9.5% of the Korean banking system's total assets and deposits, respectively. When Hana and Korea Exchange Bank (KEB, A-/Stable) are merged in several years, their combined market share would be comparable to the largest banks in Korea. KEB was acquired by Hana's parent, Hana Financial Group (HFG), in 2012.
The Stable Outlook reflects the sovereign's Outlook and Fitch's view that, over the medium term, there is likely to be no diminishing of the sovereign's propensity to support systemically important banks such as Hana.
RATING SENSITIVITIES - IDRs, SR, and SRF
The bank's IDRs, SR and SRF are sensitive to changes in the ability and propensity of the Korean authorities to provide support. Global regulatory initiatives aimed at reducing implicit government support available to banks may cause downward pressure on the ratings in the long term. The consolidation with KEB would not trigger upgrades to Hana's IDRs, SR or SRF, given that its current ratings are already at the highest level for Korea's commercial banks.
KEY RATING DRIVERS - VR
Hana's 'bbb+' VR reflects its solid company profile, and moderate management and risk appetite. Noting that the operating environment in Korea is sound, albeit softening, Hana's VR also takes into account the bank's sound loan quality, above industry-average net profitability (but modest compared with international peers), adequate capitalisation, and moderate funding/liquidity. Fitch expects that Hana's company profile might improve gradually in the long term if Hana and KEB are consolidated successfully.
As one of the major nation-wide commercial banks, Hana has a solid franchise in Korea, albeit one that is smaller than other large (and higher rated) banks in the country. Hana's business is focused on high net worth individuals, although it has taken steps to increase the proportion of mass-market customers to improve liquidity and margin.
The management of Hana and its parent, Hana Financial Group (HFG), is quite stable and most of its executive managers are internally promoted. However, in Fitch's view, management often sets challenging targets and quickly executes strategies with limited preparation, which have exposed vulnerabilities in its operational risk controls. Hana/HFG has improved its operational risk controls, but there is room for further improvement.
Hana's overall loan quality is sound. Its precautionary-and-below loan ratio (2.5% at end-3Q13) is better than the industry average (about 4%) thanks to its sound underwriting standards and a loan portfolio that is weighted towards households and self-employed borrowers. In Fitch's view, Hana's household debt portfolio is a long-term concern because households' debt servicing ability is likely to continue weakening gradually in the absence of the government taking affirmative actions to arrest growth in household leverage.
The bank's net profitability has outperformed the industry average due to its tighter control of general and administration costs and lower credit cost than its local peers. Having said that, its net interest margin (NIM, 1.5% in 3Q13) is below the industry average (1.9%), given that its main customers are high net worth individuals, who are more savvy about deposit and loan rates. Fitch also considers Hana to have a stronger risk appetite than higher rated banks.
Like most Korean banks, Hana is highly dependent on foreign-currency wholesale funding, even though it has ensured that foreign-currency lending is funded by long-term debt, in line with regulatory guidance. Nevertheless, its funding and liquidity profile is still below industry average. Its loan-to-customer deposit ratio was 134% at end-3Q13, higher than the commercial banks' average of 122%.
Hana is likely to maintain its capitalisation at its current adequate level (Fitch core capital ratio: 12.6% at end-3Q13), given that the regulators are likely to designate it as a domestically systemically important bank (D-SIB) in due course. This designation would mitigate the pressure to pay dividends to its parent, which has high double leverage ratio of around 125%.
RATING SENSITIVITIES - VR
Hana's VR could be upgraded if there is sustainable improvement in its margin and funding/liquidity along with a noticeable improvement in strategy execution and risk control - more in line with higher rated local peers. Fitch expects that it would take a long time for Hana/HFG to integrate with KEB successfully and create synergies that materially strengthen its franchise. However, any material development in the consolidation process with KEB might trigger a rating review. The VR could be downgraded if any significant operational risks materialise repeatedly and damage its credit profile or reputation. Similarly, a more aggressive approach to growth and risk appetite could also exert downward pressure on the VR.
KEY RATING DRIVERS AND RATING SENSITIVITIES- Senior Unsecured Debt
The rating on Hana's 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. The rating actions are as follows:
Long-Term IDR published at 'A-'; Outlook Stable
Short-Term IDR assigned at 'F1'
Viability Rating assigned at 'bbb+'
Support Rating published at '1'
Support Rating Floor published at 'A-'
Senior unsecured debt and GMTN programme assigned at 'A-'