October 13, 2017 / 3:39 AM / a year ago

Fitch Affirms Standard Chartered Bank Korea at 'A'; Outlook Stable

(The following statement was released by the rating agency) SEOUL, October 12 (Fitch) Fitch Ratings has today affirmed the Long-Term Issuer Default Rating (IDR) on Standard Chartered Bank Korea Limited (SCBK) at 'A'. The Outlook is Stable. At the same time, Fitch has affirmed the Viability Rating at 'bbb'. A full list of rating actions is at the end of this rating action commentary. The rating action follows the affirmation of ratings on Standard Chartered Bank (SCB: A+/Stable/a), the sole owner of SCBK, on 11 October 2017 (see <a href="https://www.fitchratings.com/site/pr/1030516">Fitch Affirms Standard Chartered's 'A+' Rating, Revises Holdco's Outlook to Negative). KEY RATING DRIVERS IDRS AND SUPPORT RATING The bank's IDRs and Support Rating of '1' reflect Fitch's view that there is an extremely high likelihood that its parent, SCB, would provide support to the bank, if required. SCBK's Long-Term IDR is equalised with the Viability Rating of SCB and its ultimate parent, Standard Chartered PLC (SC, A+/Negative/a). The anchor rating of SCBK's Long-Term IDR is the parents' Viability Rating because Fitch believes that SCBK would not benefit from the parents' significant junior debt buffer that uplifts their Long-Term IDR one notch above their Viability Rating. Such a buffer reduces the risk of default on senior obligations issued by the parents, as measured by their Long-Term IDR, compared to the risk of the entities failing, as measured by their Viability Rating. SCBK forms a key part of SCB's extensive international transaction banking operation in export-oriented South Korea where there are substantial trade volumes from the corporate segment. SCBK is fully owned by SCB and shares the parent's brand name. SCB has shown continued commitment to its Korean subsidiary even though Korea's business environment has been very challenging for a foreign-owned player like SCBK. SCBK's Stable Outlook reflects SCB's Stable Outlook. VIABILITY RATING SCBK's 'bbb' Viability Rating is mainly driven by its weak earnings from traditional commercial banking operations and high reliance on trading operations. It also takes into account improving asset quality, capitalisation that is above its local peers and strong ordinary support from SCB, especially in risk management and foreign-currency funding. Fitch assesses that SCBK's earnings from traditional commercial banking operations do not sufficiently compensate for its high general and administrative (G&A) expenses and credit costs. Its net profits, therefore, have been highly reliant on its securities, FX and derivatives operation, which can be quite volatile depending on capital market conditions. SCBK's strategy to strengthen its local retail franchise since late-2015 has arrested its declining loans and deposits market share in Korea's banking system at 2.0% and 2.4%, respectively, at end-2016. Its high loan growth of 11% in 2016 (versus 4% for the local commercial bank average), which focused on residential mortgages, modestly increased its net interest income base. Fitch estimates that SCBK's underlying operating profits/risk-weighted assets have improved to around 1% but the major contribution continues to be driven by the securities, FX and derivatives operation. SC's de-risking strategy in recent years has resulted in SCBK's risk-weighted assets declining by 14% at end-1H17 from end-2015. The reduction was largely driven by a notable cut in the credit risk-weighted assets of the equity, corporate and non-mortgage retail sectors. Fitch expects the Fitch Core Capital ratio (16.5% at end-1H17) to remain above the local commercial bank average (13.1%) in the near term due to its stable risk appetite, even though further improvement could be limited by its modest internal capital generation. Loans to households and self-employed individuals, in aggregate, represented about 70% of SCBK's total loans at end-1H17, compared with its major local peers' average of about 60%. While it remains unclear how Korea's weakening household debt servicing ability will affect SCBK, Fitch does not see Korea's household debt issue as an imminent systemic one yet because of Korea's relatively strong job security that is backed by strong labour laws and the low interest-rate environment. Fitch expects the precautionary-and-below loans ratio (1.5% at end-1H17) as per the local regulator's loan quality categorisation to remain broadly in line with the local commercial bank average (1.5%). SCBK's loans-to-customer-deposits ratio (125% at end-2016; adjusted for loans and deposits to/from financial institutions) has been relatively stable over the last three years. SCB and its affiliates provide a significant portion of SCBK's foreign-currency funding in support of the latter's sizeable FX and transaction banking operations. RATING SENSITIVITIES IDRS AND SUPPORT RATING The IDRs and Support Rating are sensitive to a change in SCB's Viability Rating or any change in the relationship with its parent. VIABILITY RATING The bank's Viability Rating is sensitive to a change in Fitch's assumptions regarding SCBK's company profile, underlying profitability and operating environment. Fitch may upgrade the Viability Rating if SCBK strengthens its business model and track record of strategic execution, which is likely to be reflected in its better underlying earnings structure. Fitch does not expect a downgrade of the Viability Rating in the near term unless its balance sheet weakens significantly, which may come from a sudden external shock to the operating environment or a significant deterioration in the bank's risk appetite. The rating actions are as follows: SCBK Long-term Foreign-Currency IDR affirmed at 'A'; Outlook Stable Short-term Foreign-Currency IDR affirmed at 'F1' Viability Rating affirmed at 'bbb' Support Rating affirmed at '1' 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 Heakyu Chang Senior Director +82 2 3278 8363 Committee Chairperson Jonathan Cornish Managing Director +85 2 2263 9901 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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