May 17, 2017 / 7:50 AM / 7 months ago

Fitch Affirms KEB Hana Bank at 'A-'; Outlook Stable

(The following statement was released by the rating agency) SEOUL, May 17 (Fitch) Fitch Ratings has affirmed South Korea-based KEB Hana Bank's Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Fitch has also affirmed the bank's Viability Rating at 'a-'. A full list of rating action is at the end of this commentary. KEY RATING DRIVERS IDRS, VIABILITY RATING AND SENIOR DEBT KEB Hana's IDRs and senior debt ratings are underpinned by its Viability Rating, which reflects the bank's significant franchise in Korea, backed by a dominant market position in foreign-currency operations and strengthening capitalisation. The Viability Rating also takes into account the bank's moderate management quality, a risk appetite Fitch sees as more aggressive than higher-rated peers and sound asset quality. The Stable Outlook reflects Fitch's expectation that the bank's strong capital will cushion the bank from unexpected stress arising from its highly concentrated corporate exposure under the still-challenging operating environment over the near-to medium-term. That being said, Fitch expects the bank to strengthen its performance amid the low interest-rate environment. We estimate KEB Hana's profitability, measured by operating profit/risk-weighted assets, to be 1.3% in 2017; a significant improvement from the previous two years when it was affected by large merger and integration costs. Fitch expects KEB Hana's Fitch Core Capital ratio to improve further in the medium-term due to its parent's plan to boost the group's capitalisation. However, it may be dragged down by the capital floor issue that the bank has faced since 2016. The Fitch Core Capital ratio increased by 1pp to 13.8% in 2016 due to large cuts in high-risk weighted corporate exposures and the new internal-ratings-based system after the integration of its former banks. KEB Hana's loan mix has changed noticeably over the previous three years, as the bank has replaced a substantial portion of its large corporate exposures with low risk-weighted mortgages and real-estate rental loans. Fitch assesses that KEB Hana's single-borrower concentration has declined significantly, albeit it remains higher than that of local peers. Fitch expects KEB Hana's ratio of loans classified as precautionary and below (1.73% at end-2016) under the local regulator's loan-quality category - which Fitch believes is a better gauge of loan-quality development than non-performing loan ratios - to remain at about the average of local commercial banks (1.68%) for the next two years unless legacy asset problems emerge. Its reserves for impaired loans, at 66% at end-2016, is still weak compared with the 82% commercial bank average, but has improved significantly from 49% at end-2014. KEB Hana's adjusted customer loans/deposits ratio improved noticeably by 7pp to 109% in 2016, as abundant liquidity drove high customer deposit growth of 11%. Fitch expects the ratio to improve further given the bank's modest loan growth plan at around the nominal GDP rate. The nation's strengthened foreign-currency reserve position, at close to 100% of external liabilities, should serve as a large buffer to the banking sector's weak foreign-currency funding profile relative to international peers. SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating and Support Rating Floor reflect Fitch's continued belief of an extremely high probability of support from the South Korean government (AA-/Stable), if required. This view is based on KEB Hana's systemic importance as one of South Korea's largest commercial banks, holding 13% of the banking system's total loans, 15% of deposits and about 40% of the nation's trade finance due to the bank's entrenched foreign-currency clearing system. SUBORDINATED DEBT KEB Hana's Basel III compliant Tier 2 debt is rated two notches below its IDR to reflect Fitch's poor recovery expectations due to the notes' subordinated status and because they are to be fully and permanently written-off upon hitting the point of non-viability. Fitch uses the support-driven IDR or Viability Rating, whichever is higher, as the anchor rating for Korea's systemically important banks' Tier 2 instruments, including KEB Hana's. This is because the Tier 2 instruments will be non-performing or will reach a point of non-viability when the issuing bank becomes insolvent or defaults. This is similar to the point at which senior debt is considered to be in default and Fitch expects pre-emptive support to be provided to avoid insolvency. KEB Hana's notes have minimal non-performance risk relative to its senior unsecured debt. For more details on Fitch's approach to rating Basel III-compliant Tier 2 notes, see <a href=" ">Fitch: Korean Basel III Terms Become More Creditor Friendly, dated 26 September 2014. RATING SENSITIVITIES IDRS, VIABILITY RATING AND SENIOR DEBT In the absence of any changes in support assumptions, any upside potential for the bank's IDRs and senior debt ratings is sensitive to the factors affecting the Viability Rating. Meanwhile, a downgrade of the IDR and senior debt is unlikely, even if the Viability Rating is downgraded, as they are currently rated at the bank's Support Rating Floor. The bank's Viability Rating is sensitive to Fitch's assessment of KEB Hana's company profile, risk appetite and financial profile. The ratings could be upgraded if there is a sustainable and significant improvement in the bank's financial strength and company profile. The ratings could be downgraded if there is a large increase in the bank's risk appetite, including rapid growth or weakened loan quality, leading to erosion of its capitalisation. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor are sensitive to any change in Fitch's assumptions about the propensity or ability of the Korean authorities to provide timely support to the bank. Furthermore, global regulatory initiatives aimed at lowering the implicit government support available to banks may cause downward rating pressure. Fitch expects the local regulator to propose a draft revision to its resolution framework to add a bail-in feature in 2H17. However, it remains to be seen how strong the language will be and how feasible it will be to enforce a bail-in in practice. The revision has already been postponed due to domestic political turmoil in Korea that has arisen since last fall and the consequent presidential election in May 2017. SUBORDINATED DEBT The ratings on the Basel III-compliant Tier 2 securities are sensitive to the same considerations that might affect KEB Hana's Long-Term IDR. A downgrade of the subordinated notes is considered to be unlikely unless the Support Rating Floor is downgraded, even if the Viability Rating is downgraded, as the IDR is rated at the Support Rating Floor. The rating actions are as follows: Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F1' Viability Rating affirmed at 'a-' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A-' Long-Term senior unsecured debt affirmed at 'A-' Subordinated Basel III-compliant Tier 2 debt affirmed at 'BBB' Contact: Primary Analyst Heakyu Chang Senior Director +82 2 3278 8363 Fitch Australia Pty Ltd, Korea Branch 9F Kyobo Securities Building 97, Uisadang-daero, Yeongdeungpo-Gu Seoul 07327, South Korea Secondary Analyst Matt Choi Associate Director +82 2 3278 8372 Committee Chairperson Parson Singha, CFA Senior Director +66 2108 0151 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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