* Banks seen likely to refinance obsolete Basel II
securities mostly onshore
By Daniel Stanton
SINGAPORE, May 15 (IFR) - Woori Bank last week
printed South Korea's first offshore Additional Tier 1 notes of
the year, but prospects for further bank capital deals from the
country seem dim.
Despite good demand for the trade, Woori remains the only
Korean bank to have issued AT1 securities offshore, having
printed three such deals. But its peers look unlikely to become
more active in the dollar market in the near future.
On Monday, Woori priced $500 million perpetual non-call five
securities at par to yield 5.25 percent, versus initial guidance
in the 5.5 percent area, drawing orders of $1.5 billion.
That was the lowest coupon for an AT1 dollar issue year to
date, but the favourable regulatory regime, which makes Korean
bank capital so attractive for foreign investors, may also curb
new deal volumes.
"We don’t expect much AT1s this year in Korea given that the
Common Equity Tier 1 and Tier 1 ratios of the Korean banks have
improved by about 90 basis points on average at end-2016 because
of the change to the regulatory capital treatment on loan-loss
reserves booked under retained earnings,” said Heakyu
Chang, senior director for financial institutions at Fitch
Last week, Moody’s published its outlook for the Korean
banking sector and estimated that onshore issuance would
continue to dominate, with much of the bank capital issues
coming from replacing legacy instruments.
"The surveyed Korean banks in aggregate plan to raise about
$22 billion in foreign currency debt in 2017, slightly higher
than the $21 billion they raised in 2016. This includes senior
unsecured and capital securities," said Sophia Lee, senior
credit officer with Moody's financial institutions group.
"Banks haven’t issued AT1s that frequently, and Tier 2
issuance has been limited to replacing legacy Tier 2s that were
phasing out under Basel III. We estimate 5.9 trillion won ($5.2
billion) in debt capital securities, issued under Basel II and
no longer counted towards capital under Basel III, will be
phased out or called in 2017, which will reduce the banks’
capital ratio by 47 basis points on a system-wide basis. Most
future issuance will be onshore, reflecting the current trend."
Woori Bank’s CET1 ratio stood at 10.7 percent at the end of
2016 and its T1 ratio at 12.8 percent, up from 8.5 percent and
10.4 percent, respectively, a year earlier. Woori's
non-performing loan ratio also improved to 0.98 percent from
1.47 percent over the same period.
Its new notes are expected to be rated Ba3/BB+
(Moody's/S&P), while Woori is a senior A2/A credit.
The notes will be written down if the bank is deemed to be
non-viable, but, under Korean rules, there is no hard trigger if
the capital ratio drops below a certain level. In Korea, the
government can inject funds into a struggling bank without
triggering a writedown of the notes.
Like Woori's previous offshore AT1 issue last September,
distributions will be restricted if the bank's capital drops
below regulatory minimum, following a change to Korean
regulations last year. The major Korean banks need to maintain a
CET1 ratio of 8 percent, T1 ratio of 9.5 percent and total
capital adequacy ratio of 11.5 percent by 2019. The average CAR
of majors Shinhan, Kookmin Bank, Nonghyup, Hana and Woori stood
at 15.6 percent in December.
"In practice, we believe that, in the event of capital
breaching minimum levels, distributions would be suspended on
all the AT1s," wrote CreditSights.
In 2018, Korea will introduce IFRS9, which will raise
provisioning costs. A Moody’s survey found that most Korean
banks expected drops of up to 50bp in their core capital ratios
when the rules come into effect, although some of that will be
offset with unrealised gains on equity investments, which will
count towards capital.
Since last September's AT1 issue, the state-owned Korea
Deposit Insurance Corp has reduced its stake in the bank,
cutting its holding to 21.4 percent with the sale of a 29.7
percent stake to a consortium of Korean financial investors.
However, that divestment did not impact Woori’s credit rating
and also did not affect investor demand.
Even launching the deal a day before the Korean presidential
election did not discourage investors. "It's a pretty stable
democracy and I don't think it added to the risk profile of this
particular issuer, given how well capitalised they are," said a
source close to the deal.
BNP Paribas, Citigroup, HSBC (B&D), JP Morgan and Nomura
were active bookrunners for Woori Bank’s AT1 issue. MUFG and
Societe Generale were passive bookrunners and Woori Global
Markets Asia was co-manager.
Issuance prospects for offshore bank capital may be limited
for this year, but regulatory changes are likely to spur more
senior bond issues in future.
Korea’s Financial Services Commission has asked banks to
work on recovery and resolution plans before the end of the
year, which could be the precursor to introducing a bail-in
regime for senior notes of domestic systemically important banks
under rules on total loss-absorbing capacity.
There will be no clarity on that prospect until at least
2018, but should Korea adopt bail-in rules for TLAC, that could
spur new issuance of senior non-preferred notes.
(Reporting by Daniel Stanton; editing by Vincent Baby and