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Dec 13 - Fitch Ratings has affirmed Citibank Korea's (CKI) Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Fitch has also affirmed CKI's Viability Rating (VR) at 'bbb+'. A full rating breakdown is provided below.
CKI's IDRs reflect Fitch's belief of an extremely high propensity of support from its parent Citibank N.A. (Citi, 'A'/Stable). Fitch expects support, if needed, to be provided on a timely basis based on the parent's strong track record of support for the Korean subsidiary. CKI is strategically important to the group's international banking operation and shares the same brand. CKI is effectively wholly owned (99.95%) by Citi and accounted for 2.9% of group's total assets at end-Q312.
Any change in Citi's ability to support CKI will directly affect CKI's IDRs. An adverse material change in Citi's willingness to support or in its relationship with CKI may also lead to a negative rating action. However, Fitch sees these as remote prospects in the foreseeable future, given CKI's important role in Citi's global franchise.
The VR reflects CKI's strong capitalisation and declining, but still solid, margins, backed by ordinary support from Citi, especially in foreign currency funding/liquidity and risk management. The VR also takes into account the bank's modest net profitability, large exposure to household loans and reliance on wholesale funding.
CKI's profitability is likely to decline due to low interest rates, increasing credit cost and regulatory pressure. Its credit cost increased to 1.0% in Q312 from 0.6% in 2011. Its net interest margin (NIM) is likely to decline due to regulatory pressure, particularly in the credit-card business. CKI's card operations contributed around 37% of NIM in Q312. To mitigate pressure on profitability, CKI has downsized headcount by 5.5% this year.
Fitch expects CKI's loan quality to deteriorate due to households' weakening debt servicing ability in Korea. Household loans (including those from self-employed individuals and credit-card receivables) accounted for around 66% of the bank's total loan book, which was higher than the industry average of around 45% at end-2011. CKI's precautionary-and-below loans ratio was 4.7% at end-Q312, compared with the sector's average of about 3.7%.
CKI's loans/customer deposits ratio remained high at 106% at end-Q312. It relies on foreign currency borrowings (KRW3.3trn at end-Q312) from Citi, which account for 50% of its wholesale funding.
CKI's Fitch core capital ratio was 15.5% at end-Q312. Its regulatory Tier 1 ratio was 14.4% under Basel II standardised approach for credit risk. Fitch expects the bank to maintain solid capitalisation to absorb unexpected credit costs and to meet Basel III capital requirements.
Downside risk for the VR could arise from a sharp deterioration in loan quality leading to significantly weakened capitalisation, although Fitch views this as a remote prospect. Upside potential for VR is limited given its moderate profitability and large exposure to unsecured consumer loans.
The rating actions are as follows:
Long-Term IDR affirmed at 'A-'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'bbb+'
Support Rating affirmed at '1'