Rating Action: Moody's confirms ratings of Industrial Bank of Korea and IBK Securities with a stable outlook, concludes review for downgrade
Global Credit Research - 05 Aug 2020
Hong Kong, August 05, 2020 -- Moody's Investors Service has confirmed Industrial Bank of Korea's (IBK) Baseline Credit Assessment (BCA) and Adjusted BCA of baa2. At the same time, Moody's has confirmed IBK's foreign currency preferred stock non-cumulative MTN rating of (P)Ba2 and foreign currency preferred stock non-cumulative rating of Ba2 (hyb).
The rating outlook on IBK is stable.
At the same time, Moody's has confirmed the A1 foreign currency long-term issuer rating and P-1 short-term issuer rating of IBK Securities Co., Ltd. (IBKS), and changed the outlook to stable from ratings under review.
Today's rating action concludes the review for downgrade initiated on 24 March 2020.
A list of all affected ratings and assessments is provided at the end of this press release.
RATINGS RATIONALE Industrial Bank of Korea
The confirmation of IBK's ratings and assessments takes into account Moody's expectation that (1) asset quality will remain relatively stable; (2) economic capitalization will recover in the next 2-3 years after a temporary deterioration, because loan growth should normalize from the second half of 2020; and (3) earnings will remain low but stable without a significant increase in credit costs.
The negative impact from lower global demand and domestic consumption has been somewhat offset by the substantial liquidity support provided by the Korean government (Aa2 stable) via fiscal and financial policies to aid small and medium-sized enterprises (SME) and other borrowers affected by the coronavirus pandemic. For example, IBK offered new loans, maturity extensions and reduced interest rates to borrowers directly affected by the outbreak on its existing loans and guarantees. Fiscal policy measures included a supplementary budget to support hospitals, businesses and low-income households. The Bank of Korea also cut its base rate to a historically low level, lowering funding costs for SMEs and sole proprietor business loan borrowers. These measures in turn supports the asset quality and profitability of IBK which has high exposures to SMEs at 79% of its total loans.
Moody's does not expect a material asset quality deterioration even after the expiration of above support measures because around 80% of IBK's SME loan portfolio was secured by either collateral or credit guarantees, as of the end of June 2020. Additionally, a gradual recovery in global demand and lower debt servicing burden amid a low interest rate environment will also support IBK's asset quality.
Finally, despite the Financial Services Commission's easing of regulatory funding and liquidity requirements, Moody's expects the banks to keep their funding and liquidity stable at levels close to the original regulatory requirements, because the relaxation is only temporary until the end of June 2021.
The stable outlook reflects the reduced downside risk facing IBK relative to Moody's earlier expectation when it placed the bank's ratings under review for downgrade in March 2020. IBK's current BCA well-captures Moody's expectation that its financial metrics will remain broadly stable over the next 12-18 months. Nevertheless, a key downside risk to the stable outlook is that of prolonged disruptions to domestic and external activity related to the coronavirus pandemic, which would pressure asset quality and profitability.
IBK's baa2 BCA reflects its (1) stable funding profile; (2) adequate asset quality, which is in line with the Korean banking system average; and (3) weak capitalization when compared to the industry average, although supported by a series of capital injections from the Korean government. The Korean government injected KRW676.5 billion in April 2020, KRW107.8 billion in June 2020, and KRW484.5 billion in July 2020.
Its Adjusted BCA, which incorporates no affiliate support, is at the same level as its BCA.
IBK's Aa2 rating incorporates a six-notch uplift from its BCA of baa2. This uplift is based on the strong links between the bank and the Korean government (Aa2 stable), given IBK's role as a policy bank. In the context of Moody's Banks Methodology, Moody's applies a "government-backed" level of support to IBK's ratings based on (1) a de facto deficiency guarantee under Article 43 of the IBK Act; (2) the government's majority ownership of the bank; and (3) the bank's important policy mandate to support Korea's SMEs, new industries and the high-tech sector.
IBK's long-term/short-term counterparty risk ratings (CRR) are positioned at Aa2/P-1, and the bank's long-term/short-term counterparty risk assessment (CRA) is positioned at Aa2(cr)/P-1(cr). Korea does not have an operational bank resolution regime. Moody's therefore applies a basic Loss Given Failure approach in rating Korean banks. The starting point for the CRR and CRA are one notch above the bank's Adjusted BCA, to which Moody's then adds the government support uplift. The CRR and CRA benefit from five notches of government support.
IBK Securities Co., Ltd. (IBKS)
The confirmation of IBKS' issuer ratings reflect Moody's assessment that the ability of its parent -- IBK -- to support the bank will remain intact. This is reflected in a one-notch uplift incorporated in IBKS' issuer rating on a very high level of affiliate support from IBK.
At the same time, the confirmation of IBKS' ratings takes into account (1) Moody's expectation of slower risk asset growth as a result of various prudential regulatory measures recently implemented or under discussion by the Financial Supervisory Service; (2) the company's stable liquidity and funding position maintained through the recent market volatility in March and April; and (3) its relatively stable profitability even amid the coronavirus-led market volatility.
New regulations that were introduced to reign in risk-taking by securities firms include: (1) regulations effective since July to limit securities firms' contingent liabilities stemming from real estate projects; and (2) guidelines that mandate stricter internal controls on the sale of complex investment products such as private equity funds and structured financial products. In addition, regulators have also announced plans to enhance monitoring of key risk areas such as equity linked securities (ELS).
The company's assigned standalone assessment of Baa3 reflects its (1) strong funding profile and relatively low leverage among its rated Korean peers because of available credit lines from Korea Securities Finance Corporation (KSFC, Aa2 stable); (2) modest earnings and stable earnings volatility; and (3) relatively lower risk appetite compared to the larger securities firms we rate given its limited exposure to internally hedged equity linked securities (ELS) and its holdings of high quality bond portfolio. Offsetting this is the risk from the firm's concentrated exposures to contingent liabilities such as corporate guarantees and real estate projects which is large relative to its small equity base.
IBKS' issuer ratings incorporate a four-notch uplift based on Moody's expectation of a very high level of government support via its parent IBK, in times of need. This reflects Moody's view that IBKS plays a vital role in executing IBK and the government's policy initiatives of supporting Korea's SME sector.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD MOVE THE RATINGS UP - IBK
IBK's long-term senior unsecured debt ratings are currently placed at Aa2, in line with the government's rating of Aa2. Therefore, an upgrade of IBK's ratings is unlikely unless the government's rating is upgraded.
IBK's BCA could be upgraded if (1) its tangible common equity (TCE) capital ratio exceeds 11.0%; (2) the three-year average of its net income/tangible assets exceeds 1.5%, without any sustained deterioration in its asset quality.
WHAT COULD MOVE THE RATINGS DOWN - IBK
IBK's ratings may be downgraded if (1) the government support clause in the IBK Act is weakened and the bank's importance to the government is weakened, or (2) if the government's rating is downgraded.
IBK's BCA could be downgraded if (1) its TCE capital ratio falls below 9.5%; (2) the three-year average of its net income/tangible assets falls below 0.5% on a sustained basis because of a sharp increase in credit losses; (3) its problem loan ratio rises above 2.0%.
WHAT COULD MOVE THE RATINGS UP - IBKS
IBK Securities' ratings could be upgraded if (1) IBK's rating is upgraded, or if there is more explicit support from IBK or the government; (2) a combination of an improvement in the company's liquidity profile, less volatile profitability, and an increase in its long-term funding, on a sustained basis.
WHAT COULD MOVE THE RATINGS DOWN - IBKS
Moody's could downgrade ratings if (1) the willingness and ability of the government to provide support weaken, (2) the strategic importance of IBKS to IBK weakens, and (3) the status of IBK as a policy bank changes.
Moreover, any indications of control or risk management failures, a marked increase in IBK Securities' risk appetite, or a sharp increase in earnings volatility could put downward pressure on the company's standalone assessment. Nevertheless, Moody's notes that the impact of such a development on its ratings could be limited, due to the high likelihood of affiliate and government support.
The principal methodology used in rating Industrial Bank of Korea was Banks Methodology published in Novemnber 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. The principal methodology used in rating IBK Securities Co., Ltd. was Securities Industry Market Makers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187332. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Industrial Bank of Korea is headquartered in Seoul with total assets of KRW322.1 trillion (USD264.6 billion) at the end of March 2020.
IBK Securities Co., Ltd., is headquartered in Seoul and reported total consolidated assets of KRW4.8 trillion ($4.0 billion) at the end of March 2020.
LIST OF AFFECTED RATINGS
..Issuer: Industrial Bank of Korea (Lead Analyst: Tae Jong Ok)
.... Adjusted Baseline Credit Assessment, Confirmed at baa2
.... Baseline Credit Assessment, Confirmed at baa2
.... Pref. Stock Non-cumulative MTN (Foreign Currency), Confirmed at (P)Ba2
.... Pref. Stock Non-cumulative (Foreign Currency), Confirmed at Ba2 (hyb)
..Issuer: IBK Securities Co., Ltd. (Lead Analyst: Young Kim)
.... Long-term Issuer Rating (Foreign Currency), Confirmed at A1
.... Short-term Issuer Rating (Foreign Currency), Confirmed at P-1
.... Outlook, Changed to Stable from Ratings under Review
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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