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Fitch Affirms Korea Housing Finance Corporation at 'AA-'/Stable
August 31, 2017 / 10:18 AM / a month ago

Fitch Affirms Korea Housing Finance Corporation at 'AA-'/Stable

(The following statement was released by the rating agency) HONG KONG, August 31 (Fitch) Fitch Ratings has affirmed Korea Housing Finance Corporation's (KHFC) Foreign-Currency Long-Term Issuer Default Rating (IDR) at 'AA-' and Foreign-Currency Short-Term IDR at 'F1+'. The Outlook on the Long-Term IDR is Stable. The affirmation of the IDRs reflects stable state ownership (100% - direct and indirect) of KHFC, its social housing policy role as a quasi-government financial institution, and continuous capital injection from the Korean government and Bank of Korea. KEY RATING DRIVERS Ratings Equalised With Sovereign: KHFC's ratings are equalised with the ratings of Korea (AA-/Stable/F1+), reflecting a high probability of extraordinary support from the government based on a legal requirement. The entity's policy is stipulated and closely monitored by various Korean authorities. Under Fitch's public-sector entities rating criteria, KHFC is classified as a credit-linked entity. Legal Status Stronger: KHFC was established in 2004 under the Korea Housing Finance Corporation Act that requires the government to cover its losses when it has insufficient reserves, which we view as a solvency guarantee. The entity performs a crucial role in housing finance policy by securitising mortgages, which promotes long-term, stable housing finance. A steering committee, with six members including civil servants, decides the entity's major policies and sets its budget. Integration Mid-range: Interest income accounts for 90% of total revenue and the borrowings are mostly raised from capital markets using its strong credit profile as a quasi-government organisation. The government made irregular but frequent capital injections when KHFC was in need of capital expansion due to frequent issuance of mortgage-backed securities and increasing housing finance credit guarantees. The entity received KRW134 billion, KRW219 billion and KRW398 billion in 2012, 2013 and 2015 (11%, 15% and 22% of equity), respectively. The state increased the authorised equity from KRW2 trillion to KRW5 trillion in 2016 to support its growing operations, implying continuous capital injections, if the need arises. Strategic Importance Stronger: The entity provides access to long-term and stable housing finance to low- and middle-income earners to enhance housing welfare and support the national economy. KHFC's role has been heightened due to record high household debt in Korea and the recent tightening in property rules. KHFC helps to improve household debt quality in line with the government's policy goal by swapping short-term bullet loans with floating interest rates for long-term amortised loans with fixed interest rates. Control Stronger: KHFC is wholly owned by the state and, as such, is closely supervised by various Korean authorities. The Financial Services Commission, the nation's financial regulator, is primarily involved in KHFC's general operations and supervises the Housing Finance Credit Guarantee Fund, which is managed by KHFC. The Ministry of Strategy and Finance monitors budgeting. The entity's president is appointed by the government, and internal and independent auditors oversee its audit system. Strong Asset Quality: KHFC is a profitable company, with net operating income making up about 10% of equity, and its asset quality is strong. Net interest income rose 50.2% yoy to KRW386 billion in 2016 from KRW257 billion in 2015 as net interest margins (NIMs) improved after two years' of consecutive declines. Pre-provision operating profit rose 72% yoy to KRW281 billion in 2016 on the back of NIM recovery as well as stable selling, general and administrative costs. Loan loss provision remains low at 0.04% of total loans. Loans account for 90% of total assets and 96% of total loans are secured (mortgage). The entity's strong asset quality is evident in its non-performing loan (NPL) ratio of 0.25% and increasing NPL coverage ratio of 150% as of 1Q17 versus 70% at end-2014. RATING SENSITIVITIES Credit Linked to Sovereign: A positive rating action for the sovereign, in conjunction with consistent strong support from the state, would lead to positive rating action on KHFC. Triggers for Downgrade: A sovereign downgrade, significant changes leading to a dilution in state ownership/control, or weakened links with the government, including a decline in the importance of its public policy role, may lead to negative rating action. Contact: Primary Analyst Ethan Lee Associate Director +852 2263 9912 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Terry Gao Senior Director +852 2263 9972 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 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. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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