Hong Kong, November 21, 2022 -- Moody's Investors Service has affirmed the ratings and assessments of Industrial Bank of Korea (IBK).
The outlook remains stable.
A full list of the affirmed ratings can be found at the end of this press release.
RATINGS RATIONALE
The affirmation of IBK's Aa2 ratings incorporates (1) the bank's baa2 Baseline Credit Assessment (BCA), and (2) a six-notch uplift reflecting the government-backed level of support from the Government of Korea (Aa2 stable), if needed.
IBK's baa2 BCA reflects its stable funding despite a high market funding ratio, underpinned by the Small and Medium Industry Financing Bonds that it sells to retail customers; adequate liquidity in line with the system average; and stable but modest asset quality, profitability and capitalization because of the bank's policy role in supporting the small- and medium-sized enterprises (SME) sector.
Moody's forecasts IBK's asset quality to remain largely stable over the next 12-18 months, albeit with a modest increase in its problem loan ratio because rapid interest rate hikes and high inflation will weigh on borrowers' repayment capabilities. Nevertheless, the agency does not expect material asset quality deterioration for the bank, given its diversified borrower mix within the SME segment, with more than 80% of its SME loans secured by collateral or credit guarantees, as of 30 September 2022. In addition, the extension of Covid-19 relief measures such as maturity extensions and repayment deferrals to 30 September 2025 and 30 September 2023, respectively, as well as the government's liquidity injection measures to stabilize the domestic short-term funding market in October and November 2022, will support IBK's asset quality, given the bank's high exposure to SMEs at 81% of its total loans as of 30 September 2022.
Moody's expects IBK to maintain its modest capitalization, supported by capital injections from the Korean government when needed, as evidenced by the government's track record, including KRW1.3 trillion in 2020 and KRW49.1 billion in 2021 to support the bank's strong loan growth amid the pandemic. The agency expects IBK to maintain loan growth of 6%-7% in 2023 as it continues to support the SME sector.
The bank's profitability will benefit from widening net interest margins on the back of rising interest rates, while its credit costs will not increase meaningfully, given the bank's conservative provisioning since 2020 that raised its loan loss reserves to problem loan ratio to 130.2% as of 30 June 2022 from 77.5% at the end of 2019.
Moody's expects the bank to maintain its adequate funding and liquidity, despite rising interest rates resulting in higher customer demand for time deposits, as well as retail demand for its Small and Medium Industry Financing Bonds. The agency also expects IBK to keep its liquidity largely stable at current levels, which the bank has maintained since early 2020 when liquidity coverage ratio requirement was relaxed temporarily in response to the pandemic.
IBK's Adjusted BCA, which incorporates no affiliate support, is at the same level as its BCA.
Moody's assessment of a government-backed level of support from the Korean government considers (1) the government's 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 Aa2/P-1, and its long-term/short-term Counterparty Risk (CR) Assessments are 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 points for the CRR and CR Assessments are one notch above the bank's Adjusted BCA, to which Moody's then adds a five-notch uplift for government support.
IBK's preferred stock non-cumulative medium-term note (MTN) rating of (P)Ba2 is positioned three notches below the bank's baa2 BCA, reflecting standard notching under the Basic Loss Given Failure framework.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
IBK's long-term ratings are currently placed at Aa2, in line with the sovereign rating. Therefore, an upgrade of the bank's ratings is unlikely unless the government's rating is upgraded.
Moody's could raise IBK's BCA if its tangible common equity (TCE)/risk-weighted assets (RWA) ratio exceeds 12.0% and its three-year average net income/tangible assets exceeds 1.5% on a sustained basis, without a material increase in its credit costs.
Moody's could downgrade IBK's ratings if the government's rating is downgraded or if changes to the IBK Act diminish the government's responsibility to maintain the bank's solvency.
IBK's BCA and Adjusted BCA could be downgraded if its TCE/RWA falls below 10%; its three-year average net income/tangible assets falls below 0.4% on a sustained basis; or its asset quality deteriorates substantially.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Industrial Bank of Korea is headquartered in Seoul with total assets of KRW433.1 trillion (USD302.8 billion) as of 30 September 2022.
LIST OF AFFECTED RATINGS/ASSESSMENTS
.. Issuer: Industrial Bank of Korea
.... Baseline credit assessment, Affirmed at baa2
.... Adjusted baseline credit assessment, Affirmed at baa2
.... Long-term/short-term counterparty risk assessments, Affirmed at Aa2(cr)/P-1(cr)
.... Long-term/short-term counterparty risk ratings (Foreign and Local Currency), Affirmed at Aa2/P-1
.... Long-term bank deposit rating (Foreign Currency), Affirmed at Aa2 with a stable outlook
.... Short-term bank deposit rating (Foreign Currency), Affirmed at P-1
.... Long-term/short-term deposit note/CD program ratings (Foreign Currency), Affirmed at (P)Aa2/(P)P-1
.... Senior unsecured rating (Foreign Currency), Affirmed at Aa2 with stable outlook
.... Senior unsecured MTN program rating (Foreign Currency), Affirmed at (P)Aa2
.... Pref. Stock Non-cumulative MTN program rating (Foreign Currency), Affirmed at (P)Ba2
.... Commercial paper rating (Foreign Currency), Affirmed at P-1
.... Other short term rating (Foreign Currency), Affirmed at (P)P-1
.... Outlook, Maintained at stable
.. Issuer: Industrial Bank of Korea, Hong Kong Branch
.... Long-term/short-term counterparty risk assessments, Affirmed at Aa2(cr)/P-1(cr)
.... Long-term/short-term counterparty risk ratings (Foreign and Local Currency), Affirmed at Aa2/P-1
.... Long-term/short-term deposit note/CD program ratings (Foreign Currency), Affirmed at (P)Aa2/(P)P-1
.... Outlook, Maintained at stable
.. Issuer: Industrial Bank of Korea, London Branch
.... Long-term/short-term counterparty risk assessments, Affirmed at Aa2(cr)/P-1(cr)
.... Long-term/short-term counterparty risk ratings (Foreign and Local Currency), Affirmed at Aa2/P-1
.... Long-term/short-term deposit note/CD program ratings (Foreign Currency), Affirmed at (P)Aa2/(P)P-1
.... Outlook, Maintained at stable
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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.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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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
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Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Jungmin Arlene Sohn
Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Sophia Lee, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
