Hong Kong, June 12, 2015 -- Moody's Investors Service has affirmed KDB Asia Ltd.'s local and
foreign currency long-term deposit ratings of Aa3, baseline
credit assessment (BCA) of ba2, and short-term deposit ratings
of P-1.
At the same time, Moody's has lowered its adjusted BCA to ba2 from
aa3.
Moody's has also changed the rating outlooks to positive from stable.
The change in outlook follows Moody's revision of the outlook on
Korea's sovereign ratings to positive from stable on 10 April 2015.
KDB Asia has a strong linkage with the Korean government (Aa3 positive)
through its parent, the Korea Development Bank (KDB: Aa3 positive,
ba2).
These rating actions conclude the review initiated on 17 March 2015 following
the publication of Moody's new bank rating methodology.
RATINGS RATIONALE
The new bank rating methodology includes a number of elements that Moody's
has developed to help accurately predict bank failures and determine how
each creditor class is likely to be treated when a bank fails and enters
resolution. These new elements capture insights gained from the
2008-09 financial crises and the fundamental shift in the banking
industry and its regulation.
In light of the new bank rating methodology, Moody's rating actions
reflect the following considerations: (1) the "Strong +" macro
profile of Korea; (2) KDB Asia's standalone credit strength
of ba2 anchored at the same BCA as its parent; and (3) indirect systemic
support for the bank from the Korean government through the Korea Development
Bank.
1) "STRONG+" MACRO PROFILE OF KOREA
With KDB Asia's business in Korea, because more than 75%
of its loans are for the customers of KDB -- its parent
-- KDB Asia itself benefits from operating in an economy with a very
high degree of resilience, competitiveness and strong fiscal fundamentals.
But, a moderate degree of susceptibility to event risk is also apparent.
The banking system's credit conditions are stable. The ratio of
private sector credit to GDP is high, but is likely to remain stable
due to the cautious policy stance of the Bank of Korea, while corporates
continue to deleverage.
Funding conditions are characterized by a reliance on wholesale funding,
particularly for foreign currencies. While this situation has been
one of the key weaknesses of the Korean banking system, an easing
in this dependency has occurred in recent years.
Additionally, the government's pro-consumer policy stance
has resulted in various regulations that have pressured revenue downwards.
2) ITS BCA ANCHORED AT THE SAME BCA OF ITS PARENT
KDB Asia's standalone ba2 BCA, anchored at the same BCA as its parent,
reflects KDB Asia's strong linkage with its parent.
KDB Asia is strategically important to its parent -- KDB --
and relies on funding from KDB.
KDB Asia is the operating entity for KDB's commercial banking and investment
banking business in Asia. Moreover, KDB Asia plays a strategically
important role in KDB's expansion into the cross-border business
in China and Hong Kong.
KDB Asia has maintained a very high level of capitalization since it was
established in 1986. Its Tangible Common Equity to Risk Weighted
Assets ratio was 35.2% at end-2014.
Moody's expects the bank to maintain a similar level of capitalization
as KDB Asia's risk weighted assets are likely to grow at a slower pace
than that for internally generated retained earnings.
KDB Asia's profitability is also relatively high, at 1.53%
in 2014 in terms of net income to tangible assets, and compared
with the 0.4% average for Korean banks.
However, the bank's problem loans ratio, which measured 1.04%
at end-2014, was lower than KDB's 5.02% and
the 1.8% average for Korean banks.
KDB Asia's asset quality had, as indicated, improved to 1.04%
at end-2014 from 2.09% at end-2012.
Its concentration risk, for instance, is lower than that of
its parent. In terms of its top 20 exposures to Tier 1 capital,
KDB Asia's ratio was 96% at end-2014, a level which
was much lower than KDB's 317%.
However, KDB Asia's liquidity position is intrinsically weak as
it relies heavily on market funds (62% of total funding in 2014).
3) INDIRECT SYSTEMIC SUPPORT FROM KOREAN GOVERNMENT THROUGH THE POLICY
BANK AND ITS PARENT, KDB
The Aa3 deposit rating factors in 8 notches of systemic government support
that flows through the policy bank, KDB, which owns 100%
of KDB Asia. Moody's assumption of support is based on KDB Asia's
strategic importance to KDB's business in Asia.
Moreover, the ratings take into account Moody's assessment of a
high probability that the Korean government (Aa3 positive) would provide
support to KDB, in times of need, which in turn effectively
results in support for KDB Asia.
Moody's assumption of very strong government support for KDB, is
in turn, underpinned by Article 32 of the KDB Act, which sets
out the government's obligation to replenish any deficit should KDB's
reserves ever prove insufficient. The government fully owns KDB.
What Could Change the Rating - UP
Upward rating pressure on KDB Asia would emerge if KDB's ratings are upgraded.
KDB's long-term debt and deposit ratings are likely to be upgraded
if Korea's sovereign rating is upgraded and the deficiency guarantee in
the KDB Act remains in force. The guarantee requires the government
to replenish any deficit if KDB's reserves prove insufficient to absorb
annual net losses.
What Could Change the Rating - DOWN
Downward rating pressure would emerge if: (1) KDB's ratings are
downgraded, (2) KDB Asia's business deteriorates, or its operations
become less aligned with those of KDB, (3) KDB Asia expands operations
not related to its parent's business, or (4) KDB Asia receives
less funding from the parent as it becomes less strategically important
to KDB.
KDB Asia's BCA could be lowered if: (1) KDB's BCA is lowered,
(2) KDB Asia's asset quality deteriorates significantly, or
(3) its tangible common equity capital ratio falls substantially (35.2%
at end-2014).
The principal methodology used in these ratings was Banks published in
March 2015. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
KDB Asia Ltd. was established in 1986 as KDB's wholly owned financial
institution. It is a Restricted License Bank under the Banking
Ordinance in Hong Kong, and is engaged in merchant and investment
banking activities. It had assets totaling $1.0 billion
at end-2014.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.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 ratings tab on the issuer/entity page on www.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.
Hyun Hee Park
Asst Vice President - 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
SUBSCRIBERS: (852) 3551-3077
Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077
Moody's affirms KDB Asia Ltd.'s deposit rating of Aa3; changes outlook to positive
