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Announcement:

Moody's: Failure again to revise Korea's Agricultural Cooperative Law is credit-negative to NACF

Global Credit Research - 15 Dec 2010

Hong Kong, December 15, 2010 -- Korea's National Assembly has once again failed to pass a revision of the Agricultural Cooperative Law -- the charter for National Agricultural Cooperative Federation (NACF: A1 negative; D+/Ba1 negative) -- as the majority and minority political parties have disagreed on the details.

The disagreement focuses on issues such as the tax treatment pertaining to the reorganization of NACF into several legal entities, and the lack of clarity in the legal terminology stipulating the government's financial support.

The reorganization, which will call further attention to NACF's capital deficiency, will require an additional government capital injection of several trillion won.

When calculating regulatory capital ratios, NACF's banking unit includes almost all of its shareholders' equity as its unit's own capital.

However, the revised law would not allow this, since capital held in non-banking units after the reorganization would not count towards the restructured bank's regulatory capital base. This would make a capital injection essential if NACF is indeed reorganized.

Moody's views this failure to pass the revision as credit-negative to NACF, though it will not have an immediate negative impact on its credit ratings.

Moody's is concerned that the delay in passing the law will continue to direct NACF's management's focus on the revision rather than on enhancement of the entity's core businesses. The drive to implement its medium- to long-term business strategies -- partly built on the assumption of the revision -- could also be weakened.

The revision will provide the legal framework to break up the NACF into several legal entities; it will also enhance the competitiveness and transparency of its individual business lines.

NACF has a complex structure and a special legal status under the Agricultural Cooperative Law. It has had many conflicts with major competitors, particularly in insurance and banking, as the law has hindered fair competition for all by allowing NACF some competitive advantages and also sometimes barring its business expansion.

Despite some differences in their opinions on the details, the government and NACF have been making concerted efforts to have the law revised for a number of years now.

The restructuring of NACF -- a consequence of the revised law -- has been one of the main public policy agendas for Korea's current president, as he believes it may enhance the country's agricultural competitiveness and reduce the possibility of corruption both in NACF and among its member cooperatives.

The country's previous presidents had also tried to restructure the NACF, but had failed because of the significant complexity and political sensitivity of the issues, which was due partly to the farmers' voting power.

NACF now wants to revise the law sooner (in contrast to its previous negative stance), because it wants to clear away the legal uncertainty and focus on enhancing its franchise amid the rapidly changing competitive dynamics in the financial services industry.

In fact, we see signs that NACF's market position is waning.

Its share of customer deposits declined to about 13% in September 2010 from 15% in 2006, and its ranking by asset size also declined to the fourth-largest in 2010, from the second-largest in 2001 due to the consolidation of competitors in the banking sector. NACF's lack of capital has impeded it from acquiring other entities in the banking industry.

The government and NACF will continue to push for the revision, but the likelihood of its being passed will decline over the near term (although there is still a chance in February 2011), given that the revision may become a political issue during the next presidential election, which will take place around end-2012.

Moody's maintains its negative outlook on NACF's credit ratings due to the ongoing pressure on asset quality and earnings -- issues separate from the reorganization.

NACF's ratings are:

-Bank Financial Strength Rating of D+

-Baseline Credit Assessment of Ba1

-Foreign currency ratings of A1/Prime-1

-Foreign currency senior/subordinate/junior subordinate debt ratings of A1/A2/A2

The outlook for the ratings is negative, except for the short-term ratings, which is stable.

The NACF was established in 1961 under the Constitution of Korea and the Agricultural Co-operative Law. It acts as an umbrella organization for agricultural and livestock co-operatives and represents almost all of Korea's farmers.

The structure operates on a two-tier system, with NACF in the upper tier and member co-ops in the lower tier. The member co-ops own NACF.

NACF, headquartered in Seoul, had KRW288 trillion (USD250 billion; includes non-financial operations) in assets as of September 2010.

Hong Kong
YoungIl Choi
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
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Hong Kong
Stephen Long
MD - Financial Institutions
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
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Moody's: Failure again to revise Korea's Agricultural Cooperative Law is credit-negative to NACF
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