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June 2 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Korea-based Kookmin Bank’s (Kookmin) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A’.
The Outlook is Stable. Fitch has also affirmed Kookmin’s Viability Rating (VR) at ‘a’. A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS AND SENSITIVITIES - VR and IDRs
Kookmin’s IDRs are driven by its VR, which is underpinned by its substantial domestic retail operations, sound loan quality and strong capitalisation. The ratings also reflect its weakened underlying profitability, below-average liquidity/funding profile by international standards (mitigated by ordinary support from local authorities), challenging operating environment, and weak corporate control/management quality. Frequent changes to the senior management team at Kookmin have made it very difficult for the bank to develop long-term strategies and deliver on the goals of these strategies.
The Stable Outlook reflects Fitch’s continued expectation that Kookmin can withstand a reasonable level of financial stress and asset-quality deterioration, considering its capitalisation and retail-oriented operation. Although, Kookmin’s precautionary-and-below loans ratio (3.0% at end-2013) was slightly worse than the commercial bank average (2.9%), Fitch assesses Kookmin’s overall loan quality as sound due to its focus on mortgages and household segments. Moreover, Kookmin has been keen to cut its exposures to troubled/weak corporate sectors for the last several years.
Kookmin’s loans to households and self-employed individuals, on aggregate, represent about 70% of its total loans. While it remains to be seen how Korea’s weakening household debt servicing ability will affect Kookmin, Fitch does not think the country’s household debt is a serious issue yet.
Fitch does not expect Kookmin’s underlying profitability to improve significantly in the foreseeable future due to low interest rates and social/political pressure on bank margins and fees, especially because there are no significant cost-saving initiatives in its sizable retail operation. Fitch estimates Kookmin’s ROA will be about 0.4% for the next few years, compared with 0.3% in 2013.
Fitch expects Kookmin’s capitalisation to remain very strong. Kookmin will be designated a “domestic systemically important bank” (D-SIB) in Korea by the regulator in 2016, which will require Kookmin to hold a high level of capital. Its Fitch core capital (FCC) ratio has improved significantly to 13.9% at end-2013 from 11.1% at end-2010.
Kookmin’s loans/customer deposits ratio improved to 114% at end-2013 from 122% at end-2012. Its retail deposits/total deposits rose to 63% at end-2013 from 54% at end-2009. Like its local peers, Kookmin depends on foreign-currency wholesale funding; however, it has ensured that foreign-currency lending is funded by long-term debt, in accordance with regulatory guidance.
A sustainable, significant improvement in Kookmin’s foreign-currency funding/liquidity profile may result in positive rating action on its VR. However, such prospects are remote, considering the challenging business environment and the fact that Korean households are unlikely to own significant amounts of foreign currency.
Negative rating action on the bank’s VR could result from an increase in risk appetite, including rapid growth or weakened loan quality, leading to erosion of its capitalisation. However, Fitch does not expect the quality of Kookmin’s loans to weaken substantially in the foreseeable future.
KEY RATING DRIVERS AND SENSITIVITIES - Support Rating and Support Rating Floor Kookmin’s ‘1’ Support Rating and ‘A-’ Support Rating Floor reflect the agency’s continued belief that the South Korean government (AA-/Stable) has an extremely high propensity to support the bank, if required. This view is based on the bank’s systemic importance as the largest commercial bank in South Korea, holding 14% and 17% of the banking system’s total assets and deposits respectively.
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.
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. The full list of rating actions follows:
Long-Term Foreign-Currency IDR affirmed to at ‘A’; Stable Outlook
Short-Term Foreign-Currency IDR affirmed at ‘F1’
Viability Rating affirmed at ‘a’
Support Rating affirmed at ‘1’
Support Rating Floor affirmed at ‘A-’
Senior unsecured debt affirmed at ‘A’