August 10, 2017 / 7:39 AM / a year ago

Fitch Affirms NongHyup Bank at 'A-'; Outlook Stable

(The following statement was released by the rating agency) SEOUL/HONG KONG, August 10 (Fitch) Fitch Ratings has affirmed South Korea-based NongHyup Bank's Long-Term Issuer Default Rating (IDR) at 'A-' with Stable Outlook. Fitch has also affirmed the bank's Viability Rating (VR) at 'bbb'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT The bank's IDRs, Support Rating, Support Rating Floor and senior debt ratings reflect Fitch's view that there is an extremely high likelihood of support from the South Korean state (AA-/Stable) flowing to the bank, if required. The view reflects the bank's systemic importance as a major commercial bank in South Korea's banking system, where it holds 12% and 13% of the system's loans and deposits, respectively, at end-2016. The bank also funds the National Agricultural Cooperative Federation (NACF), its ultimate parent, to support the federation's policy operations. The Stable Outlook reflects the Stable Outlook on South Korea. NongHyup Bank's Long-Term IDR and Support Rating Floor do not reflect any uplift from its role to provide credits to the individual member cooperatives and farmers because Fitch sees its relative significance being diminished by the bank's expanding commercialised operation. The bank's policy related loans formed only 9% of its total loans at end-2016. The government neither provides any guarantee to the bank's obligations nor holds any ownership in the bank. We do not believe the authorities would prioritise NongHyup Bank over other systemically important commercial banks in providing extraordinary support in times of need. Viability Rating The bank's 'bbb' VR reflects its operational linkage to NACF, which in the past has contributed to relatively higher risk appetite and a weaker management and financial profile, compared with the higher-rated local commercial banks. It also reflects the bank's significant loan and deposit franchise in South Korea where the economy has been resilient in recent years despite several headwinds. Fitch believes that NACF's influence over NongHyup Bank's management and operation could compromise the bank's risk controls, corporate governance and long-term strategy. NACF's incentive to maximise short-term benefits to the member cooperatives and farmers has previously led the bank to take higher risk than other local commercial banks. While the bank has recently tightened its risk management tools and policies after reporting significant credit losses from exposures to troubled corporates, it remains to be seen whether they can be consistently implemented. The bank's asset quality should remain stable in the near term given that pressure on corporate restructuring has subsided in Korea, where the economy is gradually recovering. The bank shifted its loan mix towards the stable household sector in 2016 while reducing exposures to weak industrial sectors. Fitch expects the precautionary-and-below loans ratio (2.2% at end-1Q17) as per the local regulator's loan categorisation to become more comparable to the commercial bank average (1.7%) in the near term. However, the bank still holds a higher portion of loans to troubled corporates than higher-rated local peers'. Fitch estimates the near-term ratio of operating profits to risk-weighted assets to be about 1% (commercial bank average: 1% in 2016), recovering from a four-year average of 0.5%, mainly driven by low credit losses. However, bottom-line profitability should remain significantly below the commercial bank average due to the sizeable brand fees paid to NACF in support of the latter's policy operations, which typically amount to about 10-15bp of the bank's total assets and are accounted for as non-operating expense. Improving profitability and the shift in the bank's loan mix towards sectors with relatively low risk-weightings should aide slow improvement in the Fitch Core Capital ratio (12.6% at end-1Q17). However, significant improvement is unlikely given the bank's modest internal capital generation. The ratio could fall by 1.3pp if the risk-weighting on its exposure to individual cooperatives is adjusted to 100% from 20% to exclude a local regulatory benefit to the bank. NongHyup Bank's nationwide branch network and its dominance in public-sector deposit taking, backed by close relationship with local governments and public entities, underpin the strong deposit base. South Korean banks have weak foreign-currency funding profiles relative to international peers, but South Korea's strengthened foreign-currency reserve position (close to 100% of external liabilities) provide a significant buffer. RATING SENSITIVITIES IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT The bank's IDRs, Support Rating, Support Rating Floor and senior debt ratings are sensitive to a change in Fitch's assumptions around the propensity or ability of the South Korean authorities to provide support to the bank. Furthermore, global regulatory initiatives aimed at reducing the implicit government support available to banks may cause downward pressure on the ratings. Fitch expects the local regulator to propose a 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 been postponed due to the domestic political turmoil in South Korea since last fall and the subsequent presidential election in May 2017. VR The VR is sensitive to a change in Fitch's assumptions regarding the bank's relationship with NACF, which may prompt a meaningful change in the risk appetite, management quality and financial profile. The VR could be upgraded if management consistently adopted more prudent risk appetite, which may be reflected in better asset quality and capitalisation in the medium term. It could also be upgraded if there is a significant reduction in the bank's need to support NACF, which will be reflected as improved net profitability and internal capital generation. Conversely, the VR could be downgraded if the risk appetite noticeably increases, which may be reflected in aggressive asset growth far exceeding internal capital generation. The rating could also be downgraded if its capitalisation buffer significantly drops. The rating actions are as follows: NongHyup Bank Long-Term IDR affirmed at 'A-'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'bbb' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A-' Senior unsecured debt (including global medium-term note programme) affirmed at 'A-' Contact: Primary Analyst Matt Choi Associate Director +82 2 3278 8372 Fitch Australia Pty Ltd, Korea Branch 9F Kyobo Securities Building 97, Uisadang-daero, Yeongdeungpo-Gu Seoul 07327, South Korea Secondary Analyst Jonathan Cornish Managing Director +852 2263 9963 Committee Chairperson Parson Singha, CFA Senior Director +662 108 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 Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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