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Fitch Downgrades Standard Chartered Bank Korea to 'A'; Outlook Stable
October 17, 2016 / 4:51 AM / 10 months ago

Fitch Downgrades Standard Chartered Bank Korea to 'A'; Outlook Stable

(The following statement was released by the rating agency) SEOUL, October 17 (Fitch) Fitch Ratings has today downgraded the Long-Term Issuer Default Rating (IDR) on Standard Chartered Bank Korea Limited (SCBK) to 'A' from 'A+'. The Outlook is Stable. At the same time, Fitch has affirmed the Viability Rating (VR) at 'bbb'. A full list of rating actions is at the end of this rating action commentary. The downgrade of the IDR on SCBK reflects the downgrade in the VR of SCBK's parent, Standard Chartered Bank (SCB; A+/Stable) to 'a' from 'a+', on 14 October 2016 (see <a href="https://www.fitchratings.com/site/pr/1013126 ">Fitch Affirms Standard Chartered at 'A+'; Outlook Revised to Stable ). KEY RATING DRIVERS IDRS AND SUPPORT RATING SCBK's IDRs and '1' Support Rating reflect Fitch's view that there is an extremely high probability that the Korean subsidiary would be supported by its parent, if required. As a result, Fitch equalises SCBK's IDR with the VR on SCB. Standard Chartered PLC (SC, A+/Stable) and SCB's Long-Term IDRs and senior debt ratings are one notch above their VRs because we believe the risk of default on senior obligations, as measured by the Long-Term IDR, is lower than the risk of the entities failing, as measured by their VRs. This is because of the presence of a significant junior debt buffer. The uplift does not apply to SCBK, as the bank does not benefit from similar buffers. Fitch views SCBK, which operates in export-oriented South Korea, as a core part of SCB's extensive international transaction banking operation. SCBK is wholly owned by SCB, and shares the parent's brand name. SCB has shown continued commitment to the Korean subsidiary, even though Korea's business environment has proven challenging for a foreign-owned bank like SCBK. The Stable Outlook reflects the Stable Outlook on the ratings of SCB. VIABILITY RATING SCBK's 'bbb' VR reflects in large part its weak underlying profitability and company profile relative to domestic peers, and a strengthening balance sheet amid improving risk appetite. It also takes into account the challenging operating environment in South Korea. SCBK's balance sheet has shrunk, and its market shares in key segments have declined by about 2pp to 2%-3% since 2010 as SCBK tried to reposition its business amid the slowing economic growth and intensive competition in Korea. The bank has also reduced its staff and branch network, an effort to match with its small scale. Nevertheless, SCBK's strategic repositioning has not yet succeeded in delivering the scale and margins needed to support its relatively high personnel and general and administrative (G&A) expenses. SCBK's profit from traditional commercial-banking operations is not sufficient to cover G&A expenses and credit costs, leaving its business model highly reliant on securities and derivative trading, which can be quite volatile. SCBK's increasing focus on mortgages in recent years, an effort to improve risk-adjusted return, has reduced its NIM to below the average of the domestic commercial banks. Fitch expects the upper end of the range for SCBK's return on assets (ROA) to be 0.3%, or 0.7% in terms of operating profits/risk-weight assets, for the next two to three years. Fitch expects the medium-term business conditions to stabilise and gradually improve, which should support the bank's profitability and provide stability for its business model. The recent years of deleveraging and de-risking, together with a lower-risk appetite in line with SC's strategic plan, has strengthened SCBK's balance sheet. This has helped asset-quality, which has improved after SCBK shed higher-risk loans since mid-2013 and expanded in mortgages so that more than half of its total loans are mortgages. SCBK's precautionary-and-below loan (PBL) ratio was 1.9% at mid-2016, compared with the local commercial banks' average of 2.1%. SCBK's loans to households and self-employed individuals, in aggregate, accounted for about 70% of its total loans at end-1H16. While it remains unclear how Korea's weakening household debt servicing ability will affect SCBK, Fitch does not think the country's household debt level is a serious issue in the short-term. Korea has quite robust job security with strong labour laws. The banking sector's one-month delinquency rate for household loans was just 0.3% at end-1H16, reflecting measures by the local authorities to aid borrowers. The average loan-to-value ratio of the banking sector's mortgages, which account for the bulk of the household loans, is around mid-50%. The smaller balance sheet has resulted in a stronger capitalisation and liquidity/funding profile for SCBK. The bank's Fitch Core Capital ratio was 14.9% at mid-2016, compared with the Korean commercial bank average of 13.2%. SCBK's average risk weight has also further improved to 46% by mid-2016, compared with the peak of 54% at end-2013 as it reduced higher-risk assets. SCBK's loans/customer deposits ratio (after adjusting for interbank loans and deposits) has improved to around 120%, broadly in line with the local commercial banks average. Almost all of SCBK's foreign-currency funding comes from SC. RATING SENSITIVITIES IDRS AND SUPPORT RATING The IDRs and Support Rating are sensitive to any change in SCB's ratings or SCBK's relationship with its parent. VIABILITY RATING The bank's VR is sensitive to a change to Fitch's assumptions around SCBK's company profile, underlying profit structure and operating environment. Fitch may upgrade SCBK's VR if there is a significant sustainable improvement in earnings and profitability, and/or a sustainable strategy that puts the bank in a better position to expand and compete more effectively against domestic banks. Fitch does not expect a downgrade of the VR in the near term unless its balance-sheet strength deteriorates significantly, which may happen if SCBK increases its risk appetite significantly. The rating actions are as follows: SCBK Long-Term Foreign-Currency IDR downgraded to 'A' from 'A+'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F1' Viability Rating affirmed at 'bbb' Support Rating affirmed at '1' Contact: Primary Analyst Heakyu Chang Director +82 2 3278 8363 Fitch Australia Pty Ltd, Korea Branch 9F, 97 Uisadang dae-ro, Youngdeungpo-gu, Seoul 07327 Korea Secondary Analyst Matt Choi Associate Director +82 2 3278 8372 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 15 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1013210 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. 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