September 29, 2017 / 8:11 AM / a year ago

Fitch Affirms Kookmin Bank's Mortgage Covered Bonds at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) SEOUL/SYDNEY, September 29 (Fitch) Fitch Ratings has affirmed the rating on South-Korea-based Kookmin Bank's (KB, A/Stable/F1) mortgage covered bond programme at 'AAA'. The Outlook is Stable. The programme has KRW1.17 trillion of mortgage covered bonds outstanding. KEY RATING DRIVERS The affirmation of the programme's rating is based on KB's Long-Term Issuer Default Rating (IDR) of 'A', an IDR uplift of zero notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of one notch. In its analysis Fitch relies on the highest nominal asset percentage (AP) for last 12 months of 55.6%, which provides more protection than Fitch's 'AAA' breakeven AP of 82.5%. The breakeven AP corresponds to a 'AA+' tested rating on a probability of default basis and a one-notch recovery uplift. The Stable Outlook on the covered bond rating reflects the two-notch buffer against a downgrade of the issuer's Long-Term IDR. In line with criteria, in its analysis, Fitch has assumed that KB would issue another bond of USD500 million under the programme. This assumption is based on Fitch's understanding that the increase of the cover pool to around double its usual collateral balance in the last 12 months was for the purpose of new bond issuances. The 'AAA' breakeven AP of 82.5%, equivalent to a breakeven overcollateralisation (OC) of 21.2%, for the programme is primarily driven by the asset disposal loss of 16.4%. This reflects the exposure to currency risks in a recovery scenario for which Fitch applies significant stresses, as well as substantial asset and liability mismatches. The weighted-average (WA) life of the programme's cover assets is 15.0 years (14.5 years after the assumption of asset seasoning), compared with liabilities at 3.3 years (4.0 years with the addition of the assumed bond issuance). The cash flow valuation component contributes 1.5% to the breakeven OC and takes into account the effect of the interest-rate mismatch between the mostly fixed-rate cover assets (before they convert to floating rate) and floating-rate swapped liabilities during the covered bond extension period. The credit loss component is 3.6% of the breakeven OC and reflects the 'AA+' asset stress scenario being tested. In its recovery-given-default analysis, as the rating uplift exceeds the Korean Country Ceiling of 'AA+, Fitch tested the effect of currency risk on the US dollar-denominated outstanding liabilities versus the stressed remaining cover-asset-recovery value in Korean won. The agency has applied a stressed Korean won/US dollar exchange rate as per Fitch's Foreign-Currency Stress Assumptions for Residual Foreign-Exchange Exposures in Covered Bonds and Structured Finance - Excel file. As a result, the agency derived a foreign-exchange loss value of 9.45% which represents the additional assets to support at least 51% of recoveries from covered bonds assumed to be in default. Stressed recoveries of 51% are compatible with a recovery uplift of one notch. Fitch has applied a variation from its Structured Finance and Covered Bonds Country Risk Rating Criteria, which states that the rating of foreign-currency bonds cannot exceed the Country Ceiling of the country of the issuer or the cover assets, unless the transfer and convertibility (T&C) risk is mitigated. KB's covered bonds are protected via the swaps against T&C risk; however, this T&C risk will become unhedged after a default of the covered bonds as Fitch believes that the swaps would be terminated. Fitch believes that the covered bonds can be rated one notch above the Country Ceiling despite the lack of T&C protection in a recovery-given-default scenario, because timely payment is not expected in such a scenario, and T&C risk is not viewed as permanent. In Fitch opinion, the materiality of T&C risk to the covered bonds rating is small as long as the level of OC is sufficient to support ultimate payments. Fitch has also applied a variation to the APAC Residential Mortgage Rating Criteria, which does not include an analytical treatment of the asset basis risk. Fitch deems this risk to be relevant to the level of enhancement of the KB programme as 98% of the cover pool comprises hybrid loans (cover assets are linked to multiple indices), which were originated at fixed rate and expected to convert to floating rate three to five years after origination, and for which the asset basis risk is unhedged. Fitch has made an adjustment to the income level from the cover assets provided by the issuer. Fitch previously based this analysis on Korea's Cost of Funds Index (COFIX) rates, but has changed this to Korea's Certified Deposit (CD) rate, which is linked to the index for the covered bonds extension rate. Based on its analysis of data on the cover pool's interest reset to floating rate and taking into account all rate movements between the various indices (97% of the total cash flow value), the agency deducts 34bp from the floating-rate asset cash flows. Additionally Fitch applies its low and high interest-rate stresses to the same floating-rate cash flows. There is no rating impact from this criteria variation. RATING SENSITIVITIES The 'AAA' rating on Kookmin Bank's mortgage covered bonds is vulnerable to a downgrade if the relied upon asset percentage (AP), which is the highest AP of the last 12 months (55.6%), rises above the 'AAA' breakeven AP of 82.5%, if the bank's Long-Term Issuer Default Rating (IDR) falls below 'BBB+', or if the Country Ceiling on Korea is lowered by one notch to 'AA'. If the relied-upon overcollateralisation of the programme fell to the legal minimum of 5% stipulated under the Korean Covered Bond Act, the rating on the covered bonds would fall to 'A+', one notch above the bank's Long-Term IDR. Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among other things, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore, it cannot be assumed that the 'AAA' breakeven AP, which maintains the covered bond rating, will remain stable over time. Contact: Primary Analyst Keum Hee Oh Director +82 2 3278 8373 Fitch Australia Pty Ltd, Korea Branch 9F, 97 Uisadang dae-ro Youngdeungpo-Gu Seoul, 150-737, Republic of South Korea Secondary Analyst Claire Heaton Senior Director +61 2 8256 0361 Committee Chairperson Ben McCarthy Managing Director +61 2 8256 0388 The source of information used to assess these ratings was Kookmin Bank. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 14 Jul 2017) here Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel file (pub. 20 Jan 2017) here Fitch’s Foreign-Currency Stress Assumptions for Residual Foreign-Exchange Exposures in Covered Bonds and Structured Finance – Excel File (pub. 26 Oct 2016) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 23 May 2017) here Structured Finance and Covered Bonds Country Risk Rating Criteria (pub. 18 Sep 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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