Hong Kong, April 07, 2014 -- Moody's Investors Service has affirmed the ratings of Korea Development
Bank (KDB) and KDB Asia Ltd. with stable outlooks, despite
large losses incurred in 2013.
A full list of the affected ratings can be found at the end of this press
release.
RATINGS RATIONALE
"The affirmation of KDB's ratings reflects its status as a
100% government-owned policy bank. Its credit profile
is underpinned by Article 44 of the KDB Act, which requires the
Korean government to replenish any deficit should the bank's reserves
prove insufficient," says Hyun Hee Park, a Moody's
Analyst.
Although the bank incurred a large loss in 2013, Moody's has
not changed the Bank Financial Strength Rating (BFSR) of D, which
maps to a baseline credit assessment (BCA) of ba2.
This reflects the fact that KDB's BCA is lower than that of major
private sector banks in Korea and already incorporates an assumption that
KDB will have more volatile through-the-cycle performance
than the system on average. Moreover, its capital buffers
are strong, meaning that the 2013 loss has not materially weakened
its standalone credit profile.
The bank's core Tier 1 capital ratio -- despite declining
by 122 bps -- at 12.34% at end-2013 remains
one of the highest among Korean banks.
"KDB's policy role leaves it substantially exposed to relatively
weak borrowers, and problems at some of these weak borrowers resulted
in a substantial net loss in FY2013," adds Park.
The bank recorded net losses of KRW1.46 trillion ($1.4
billion) on a non-consolidated basis and KRW1.65 trillion
($1.58 billion) on a consolidated basis in FY2013.
The losses resulted from large provision expenses, including a loan
loss provision and contingent credit loss reserves, of KRW1.63
trillion ($1.55 billion) mainly on its exposure to STX Group
(unrated), which is undergoing restructuring. Further,
the bank incurred KRW148 billion ($141 million) net losses on the
sale of NPL.
Additionally, a continued slowdown in the construction sector both
in Korea and overseas led KDB to recognize a loss of KRW860 billion ($823
million), due to impairment of goodwill related to its subsidiary's
investment in Daewoo Engineering and Construction (unrated).
"Although we expect KDB's top line earnings to remain stable
as we have seen for the past three years, restructuring at several
highly leveraged companies in its portfolio -- such as Hanjin
Shipping (unrated), Dongbu Group (unrated), and Hyundai Group
(unrated) -- means credit costs will remain relatively high,"
says Park.
"KDB's NPL ratio rose to 3.07% at end-2013
from 1.59% a year ago, but is likely to go down as
KDB enters into debt-equity swap transactions on its loan exposure
to STX. However, the substantial proportion (4.24%)
of loans classified as precautionary at end-2013 could result in
further NPL formation," adds Park.
The affirmation of its final ratings also reflects Moody's assumption
that the probability of government support has increased as privatization
plans were abandoned. The bank fulfills various policy roles and
remains 100% government owned.
The affirmation of KDB Asia's ratings reflects the bank's
linkage with its parent. Its operations are highly integrated with
that of its parent and it relies heavily on funding from KDB.
KDB
What Could Change the Rating - Up
KDB's foreign-currency senior debt rating could be upgraded if
the sovereign rating is upgraded.
Its baseline credit assessment (BCA) could be raised if the bank improves
its funding profile, such that its overall loan-to-deposit
ratio drops below 200% (233% at end-December 2013),
and it succeeds in maintaining its profitability and asset quality,
in line with its major domestic peers, during market downturns.
What Could Change the Rating - Down
KDB's long-term deposit or debt ratings could be downgraded if
the sovereign rating is downgraded, or if there is a large increase
in KDB's losses incurred from its policy function, without a corresponding
increase in its capital.
The bank's BCA could be lowered if: (1) its asset quality deteriorates,
such that its NPL ratio exceeds 4% of loans (3.07%
at end-September 2013); (2) its core Tier 1 capital ratio
drops below 10% (12.30% at end-December 2013);
or (3) the bank incurs another loss in FY2014.
KDB Asia
What Could Change the Rating Up
Upward rating pressure on KDB Asia would emerge if KDB's ratings
are upgraded.
The BFSR could be raised if KDB Asia improves its profitability,
asset quality, and liquidity, while maintaining its current
capitalization levels.
What Could Change the Rating Down
Downward rating pressure would emerge if: (1) KDB's ratings
are downgraded; (2) its business deteriorates or its operations become
less aligned with those of KDB; or (3) it becomes less strategically
important to KDB.
The BFSR could be lowered if: (1) its asset quality deteriorates,
such that its NPL ratio exceeds 4% of loans (2.09%
at end-2012); or (2) its core Tier 1 capital ratio drops below
14% (36.58% at end-2012).
Affected ratings
KDB -- the long-term deposit ratings of Aa3;
the senior unsecured debt ratings/senior unsecured MTN /senior unsecured
shelf ratings of Aa3/(P)Aa3/(P)Aa3; BFSR of D, which maps to
standalone credit assessment of ba2; short-term bank deposit
rating/ commercial paper /MTN programme short-term ratings of P-1/P-1/(P)P-1.
KDB, New York Branch -- commercial paper programme
short-term rating of P-1
KDB, London Branch -- senior unsecured debt ratings
of Aa3, Senior Unsecured MTN ratings of (P)Aa3, and MTN programme
short-term ratings (P)P-1
KDB Asia -- the long-term deposit ratings of Aa3,
BFSR of D, which maps to standalone credit assessment of ba2,
and P-1 short-term deposit rating.
The principal methodology used in these ratings was Global Banks published
in May 2013. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
KDB was established in 1954 as a government-owned financial institution
pursuant to the KDB Act. With KRW167.7 trillion in assets
($160.5 billion) as of end-2013, the bank is
the largest policy bank in Korea.
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 $805.1
million at end-2013.
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
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's and KDB Asia's ratings and stable outlook
