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Rating Action:

Moody's affirms KDB's and KDB Asia's ratings and stable outlook

 The document has been translated in other languages

07 Apr 2014

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
No Related Data.
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