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Rating Action:

Moody's affirms long-term ratings of Industrial Bank of Korea with a stable outlook; places BCA under review for downgrade; reviews IBK Securities for downgrade

 The document has been translated in other languages

24 Mar 2020

Hong Kong, March 24, 2020 -- Moody's Investors Service has today affirmed the Aa2 long-term deposit, senior unsecured debt and counterparty risk ratings of Industrial Bank of Korea (IBK). At the same time, Moody's has placed IBK's baa2 baseline credit assessment (BCA), baa2 adjusted BCA, (P)Ba2 preferred stock non-cumulative MTN and Ba2 (hyb) preferred stock non-cumulative debt ratings under review for downgrade.

The outlooks on the long-term deposit and senior unsecured ratings are stable.

At the same time, Moody's has placed on review for downgrade the A1 foreign currency long-term issuer rating and P-1 short-term issuer rating of IBK Securities Co., Ltd. (IBKS).

A full list of the affected ratings and assessments can be found at the end of this press release.

RATINGS RATIONALE

Industrial Bank of Korea

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The Korean banking sector has been one of the sectors affected by the shock given their exposures to highly affected regions and industries. In addition, Korea has emerged as a new epicenter for coronavirus outbreak since late February. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

The review for downgrade on IBK's BCA reflects Moody's expectation that Korea's economic growth will slow as well as the risk of a deterioration in IBK's credit quality due to the breadth and severity of the shock from the coronavirus outbreak. In particular, IBK's asset quality could deteriorate through its exposure to a vulnerable segment of the economy, namely small- and medium-sized enterprises (SMEs). The bank is also highly exposed to the manufacturing sector, which is vulnerable to a potential global contraction in trade or disruptions to global supply chains.

Thus far, Korea has not closed its borders nor introduced a stringent lockdown, with economic activities allowed to continue and social distancing encouraged. While a significant supply shock has as a result so far been avoided domestically, Korea is nevertheless vulnerable to the global slowdown in growth as an open economy with a high trade dependence and its tight integration into global supply chains. Korea is also vulnerable to a potential new wave of confirmed cases imported from overseas.

Given these challenges, Moody's expects IBK's asset quality could deteriorate over the next 12-18 months, in particular through its high exposure to SMEs, which accounted for 79% of its loan book at the end of September 2019.

This risk is partly mitigated by the government's fiscal and monetary policy response to the economic shock. The government has announced various forms of financial support for SMEs directly affected by the outbreak, including new loans, maturity extensions and reduced interest rates for existing loans and guarantees. The government has also announced a supplementary budget to support hospitals, businesses and low-income households. In addition, the Bank of Korea has cut its official interest rate to a historical low of 0.75%.

These measures aim to combat the economic damage from the coronavirus outbreak by providing liquidity and lowering borrowing costs, and therefore will delay the recognition of asset quality deterioration. Whether these measures will translate into materially higher non-performing loans will depend on the severity and duration of the outbreak.

Given its policy role of supporting SMEs, IBK has acted as a major platform for the government to support SMEs . For example, IBK will extend KRW5.8 trillion of low interest rate loans to small offices/home offices (SOHOs) in 2020, up significantly from the KRW1.2 trillion earmarked for this purpose at the start of 2020. While these loans will have credit guarantees up to 100%, implying no or limited impact on asset quality, IBK's profitability will deteriorate from increased fee expenses for these credit guarantees.

Moody's further expects capital to remain stable, as rising asset risk will be offset by the announced KRW264 billion capital injection from the government. Further capital injections are currently being discussed and would help offset the potential decline in capitalization stemming from growth in high-risk loans and increased provisions.

Moody's regards IBK's liquidity profile as intrinsically weaker than that of the deposit-funded commercial banks because of its extensive use of wholesale funding. Its high reliance on wholesale funding is somewhat mitigated by the government's majority ownership, and its ongoing support adds stability to its funding profile. As a result of its links to the government, the bank benefits from strong access to long-dated funding and is a beneficiary of flight-to-quality considerations in challenging market conditions.

The affirmation of IBK's deposit and senior unsecured debt ratings reflects its status as a policy bank that is majority-owned by the government. Its credit profile is underpinned by Article 43 of the IBK Act, which requires the Korean government (Aa2 stable) to replenish any deficit should the bank's reserves prove insufficient. IBK's role in supporting SMEs and SOHOs during the current coronavirus outbreak further testifies to its policy role.

Moody's does not have particular governance concerns for IBK, and its governance practices follow those required under the IBK Act.

WHAT COULD CHANGE THE RATINGS UP - IBK

IBK's long-term ratings of Aa2 are already at the same level as Korea's sovereign rating of Aa2, and an upgrade is therefore unlikely unless Korea's sovereign rating is upgraded. However, the BCA and adjusted BCA could be confirmed if macro-economic conditions in Korea improve and IBK maintains sound credit metrics in line with its current assessments.

WHAT COULD CHANGE THE RATINGS DOWN -- IBK

Moody's review for downgrade of IBK's BCA will focus on the Korean government's policy response and the implications for the bank's credit strength. The review will also assess the impact from contracting domestic consumption, supply chain disruptions, and declining global demand on the bank's asset quality and profitability. The review will also focus on the effectiveness of domestic and global policy responses in supporting the domestic and global economies.

Moody's could downgrade IBK's ratings if its importance to the Korean government weakens. Moody's could downgrade IBK's BCA and adjusted BCA if (1) asset risk or profitability are likely to weaken significantly due to a prolonged domestic and global economic downturn; and/or (2) the bank faces challenges in maintaining stable funding and liquidity profiles.

IBK Securities Co., Ltd. (IBKS)

The review for downgrade of IBKS' issuer ratings considers the potential weakening of the ability of its parent IBK to support IBKS, as reflected in the review for downgrade of the BCA of IBK. Currently, IBKS' issuer rating incorporates a one-notch uplift based on a very high level of affiliate support from IBK. This one-notch of uplift will be removed should the BCA of IBK is downgraded to baa3.

At the same time, the review for downgrade reflects the potential weakening on IBKS' standalone assessment, particularly on its profitability amid the current financial market turmoil. As the company manages a large trading book of bonds and derivatives to match their structured products, it is likely that that IBKS will incur mark-to-market losses on their derivative trading associated with high market volatility. In addition, IBKS will likely see lower revenue, as the company largely derives its earnings from its investment banking business providing underwriting, advisory and financing services to SMEs, a vulnerable segment of the economy from the shock of the coronavirus outbreak, through a collaboration with IBK.

IBKS' issuer ratings incorporate a four-notch uplift based on a very high level of government support via its parent IBK, in times of need. This reflects our view that IBKS plays a vital role in executing IBK and the government's policy initiatives of supporting the SME sector in Korea.

Moody's review will focus on (1) IBKS' profitability, funding and liquidity including the impact from the coronavirus outbreak, especially considering the significant market volatility on profitability; (2) the strategic importance of IBKS to IBK, and the level of integration of IBKS with IBK and government in executing policy initiatives in response to the economic shock, which would help inform our re-assessment of the level and degree of government support.

WHAT COULD DRIVE THE RATINGS UP - IBKS

Given that the ratings are on review for downgrade, an upgrade is unlikely.

However, the ratings could be confirmed if (1) the BCA of IBK is confirmed while the standalone assessment remains stable without a significant impact from weaker profitability ,funding and liquidity; and/or (2) the BCA of IBK is downgraded but Moody's could consider an additional notch uplift from government support based on our assessment that IBKS is highly integrated with IBK and it is a key institution to execute policy initiatives to support SMEs.

WHAT COULD DRIVE THE RATINGS DOWN - IBKS

On the other hand, Moody's could downgrade ratings in case of: (1) the BCA of IBK is downgraded; (2) the standalone assessment of IBKS deteriorates with weakened profitability, funding and/or liquidity; and/or (3) the willingness and ability of government to support the company have weakened.

The principal methodology used in rating Industrial Bank of Korea, Industrial Bank of Korea, Hong Kong Branch and Industrial Bank of Korea, London Branch was Banks Methodology published in November 2019. The principal methodology used in rating IBK Securities Co., Ltd. was Securities Industry Market Makers Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Industrial Bank of Korea, headquartered in Seoul, South Korea, had total assets of KRW308 trillion (USD257 billion) at the end of September 2019.

IBK Securities Co., Ltd., is headquartered in Seoul and reported total consolidated assets of KRW5.1 trillion ($4.2 billion) at the end of September 2019.

LIST OF AFFECTED RATINGS

Industrial Bank of Korea (Lead Analyst: Tae Jong Ok)

- Foreign currency long-term/short-term bank deposit ratings of Aa2 with a stable outlook/P-1 affirmed

- Foreign currency long-term/short-term deposit note/CD program ratings of (P)Aa2/(P)P-1 affirmed

- Foreign currency and local currency long-term/short-term counterparty risk ratings of Aa2/P-1 affirmed

- Long-term/short-term counterparty risk assessment of Aa2(cr)/P-1(cr) affirmed

- Baseline credit assessment and adjusted baseline credit assessment of baa2 placed under review for downgrade

- Foreign currency senior unsecured rating of Aa2 affirmed with stable outlook

- Foreign currency senior unsecured MTN rating of (P)Aa2 affirmed

- Foreign currency preferred stock non-cumulative MTN rating of (P)Ba2 placed under review for downgrade

- Foreign currency preferred stock non-cumulative rating of Ba2(hyb) placed under review for downgrade

- Foreign currency commercial paper and other short term ratings of P-1 and (P)P-1 affirmed

- Outlook is maintained at stable

Industrial Bank of Korea, Hong Kong Branch (Lead Analyst: Tae Jong Ok)

- Foreign currency long-term/short-term deposit note/CD program ratings of (P)Aa3/(P)P-1 affirmed

- Foreign currency and local currency long-term/short-term counterparty risk ratings of Aa2/P-1 affirmed

- Long-term/short-term counterparty risk assessment of Aa2(cr)/P-1(cr) affirmed

- Outlook is maintained at stable

Industrial Bank of Korea, London Branch (Lead Analyst: Tae Jong Ok)

- Foreign currency long-term/short-term deposit note/CD program ratings of (P)Aa2/(P)P-1 affirmed

- Foreign currency and local currency long-term/short-term counterparty risk ratings of Aa2/P-1 affirmed

- Long-term / Short-term counterparty risk assessment of Aa2(cr)/P-1(cr) affirmed

- Outlook is maintained at stable

IBK Securities Co., Ltd. (Lead Analyst: Younghun Kim)

- Foreign currency long-term/short-term issuer ratings of A1/P-1 placed under review for downgrade

- Outlook changed to ratings under review from stable

REGULATORY DISCLOSURES

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 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 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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

The person who approved Industrial Bank of Korea, Bank of Korea, Hong Kong Branch and Industrial Bank of Korea, London Branch's credit ratings is Minyan Liu, CFA, Associate Managing Director, Financial Institutions Group, +852 3758 1350, +852 3551 3077. The person who approved IBK Securities Co., Ltd.'s credit ratings is Yat Man Sally Yim, CFA, Associate Managing Director, Financial Institutions Group, +852 3758 1350, +852 3551 3077.

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.

Tae Jong Ok
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

Minyan Liu, 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

No Related Data.
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