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I AGREE
Rating Action:

Moody's affirms ratings assigned to mortgage covered bonds of Kookmin Bank and Korea Housing Finance Corporation

 The document has been translated in other languages

09 Dec 2020

USD1,500 million and EUR500 million of bonds affected

Hong Kong, December 09, 2020 -- Moody's Investors Service ("Moody's") has affirmed the ratings on the mortgage covered bonds issued by Kookmin Bank and Korea Housing Finance Corporation (KHFC).

Issuer: Kookmin Bank

Kookmin Bank Global Covered Bond Programme

....US$500,000,000 2.25 per cent. Series 2016-1 Covered Bonds due 2021, Aaa affirmed

Issuer: Korea Housing Finance Corporation

Korea Housing Finance Corporation Covered Bonds 2016 (KHFC 2016 CB)

....US$500,000,000 2.000 per cent. Covered Bonds due 2021, Aa1 affirmed

Korea Housing Finance Corporation Covered Bonds 2017 (KHFC 2017 CB)

....US$500,000,000 3.00 per cent. Covered Bonds due 2022, Aa1 affirmed

Korea Housing Finance Corporation Social Covered Bonds 2018 (KHFC 2018 CB)

....EUR500,000,000 0.750 per cent. Social Covered Bonds due 2023, Aa1 affirmed

RATINGS RATIONALE

The rating affirmations consider both the structure and performance of the covered bonds, and the revision of Korea's foreign currency ceiling (FCC) to Aaa from Aa1. For additional information on the FCC revision, please refer to the announcement published on 7 December 2020: 'Moody's announces changes in country ceilings following methodology update' (https://www.moodys.com/research/Moodys-announces-changes-in-country-ceilings-following-methodology-update--PR_436193).

Following the revision of Korea's FCC to Aaa, the FCC does not constrain the highest achievable rating of foreign currency denominated covered bonds issued by Korean issuers. Moody's now considers incremental foreign currency transferability and convertibility (T&C) risks, which apply to foreign currency denominated transactions with domestic assets, to be immaterial. As such, Moody's does not see any material difference in risks between a currency swap with a foreign bank and the T&C risks covered and a currency swap with a domestic bank where the T&C risks are not covered. This broadens the pool of eligible banks which can act as initial or replacement swap providers for Aaa-rated covered bonds issued by Korean issuers, which will in turn reduce the risk of the covered bonds becoming unhedged.

Moody's has also updated several assumptions related to Korean covered bonds, reflecting the evolution on the Korean covered bond market and the observed cover pool attributes and performance. In particular, Moody's has lowered the refinancing margin, primarily because of the issuance of domestic covered bonds by several Korean banks since 2019. This has increased the depth of the Korean covered bond market, in turn reducing refinancing risk. Overall, the assumption updates reduce the minimum over-collateralization consistent with an Aaa covered bond rating (minimum Aaa OC).

For KHFC's covered bonds, the timely payment indicator of Improbable assigned to the covered bonds and the revised Korea's FCC do not constrain the covered bond ratings. As of 30 September 2020, the current levels of over-collateralization (OC) exceed the minimum Aaa OC for some of KHFC's covered bonds. However, considering the OC levels observed since closing, Moody's does not assume that OC will be continuously maintained at levels consistent with covered bond ratings higher than Aa1.

A covered bond benefits from: (1) the issuer's promise to pay interest and principal on the bonds; and (2) following a CB anchor event, the economic benefit of a collateral pool (the cover pool). The ratings therefore reflect the following factors:

(1) The credit strength of Kookmin Bank (counterparty risk (CR) assessment Aa3(cr)) and KHFC (long-term issuer rating Aa2), and a CB anchor of CR assessment or long-term issuer rating plus zero notch.

(2) Following a CB anchor event, the value of the cover pool. The stressed levels of losses on the cover pool assets following a CB anchor event (cover pool losses) for the Kookmin Bank covered bonds, KHFC 2016 CB, KHFC 2017 CB and KHFC 2018 CB are 26.4%, 29.6%, 29.6% and 33.6% respectively.

Moody's considered the following factors in its analysis of the cover pool's value:

a) The credit quality of the assets backing the covered bonds. The covered bonds are backed by Korean residential mortgage loans. The collateral scores for the cover pools of Kookmin Bank covered bonds, KHFC 2016 CB, KHFC 2017 CB and KHFC 2018 CB are 8%, 8%, 8% and 9.1% respectively.

b) The legal framework. The Korean Act on Issuance of Covered Bonds and the KHFC Act provide for the separation of the cover pool from the insolvency estate of Kookmin Bank and KHFC respectively.

c) The exposure to market risk, which is 21.1%, 24.2%, 24.2% and 27.5% for the cover pools of Kookmin Bank covered bonds, KHFC 2016 CB, KHFC 2017 CB and KHFC 2018 CB respectively.

d) The current over-collateralisation (OC) in the cover pool is 93%, 16%, 16% and 13% as of 30 September 2020 for Kookmin Bank covered bonds, KHFC 2016 CB, KHFC 2017 CB and KHFC 2018 CB respectively, of which Kookmin Bank provides 23% and KHFC provides 3% for their respective covered bonds on a "committed" basis (see Key Rating Assumptions/Factors, below).

The timely payment indicator (TPI) assigned to the Kookmin Bank covered bonds is Probable, and to the KHFC covered bonds is Improbable. These TPIs do not constrain the ratings of the covered bonds at their current levels.

As of 30 September 2020, the total value of the assets included in the cover pool of Kookmin Bank covered bonds was approximately KRW2,480 billion, comprising 20,314 residential mortgage loans. The residential mortgage loans have a weighted-average (WA) seasoning of 64 months and WA unindexed and indexed loan-to-value (LTV) ratios of 47.9% and 40.5%, respectively.

As of 30 September 2020, the total value of the assets included in the cover pool of KHFC 2016 CB was approximately KRW643 billion, comprising 6,708 residential mortgage loans. The residential mortgage loans have a weighted-average (WA) seasoning of 53 months and WA unindexed and indexed loan-to-value (LTV) ratios of 48.4% and 41.5%, respectively.

As of 30 September 2020, the total value of the assets included in the cover pool of KHFC 2017 CB was approximately KRW656 billion, comprising 6,996 residential mortgage loans. The residential mortgage loans have a weighted-average (WA) seasoning of 48 months and WA unindexed and indexed loan-to-value (LTV) ratios of 48.2% and 41.6%, respectively.

As of 30 September 2020, the total value of the assets included in the cover pool of KHFC 2018 CB was approximately KRW735 billion, comprising 7,126 residential mortgage loans. The residential mortgage loans have a weighted-average (WA) seasoning of 41 months and WA unindexed and indexed loan-to-value (LTV) ratios of 53.7% and 46.1%, respectively.

KEY RATING ASSUMPTIONS/FACTORS

Moody's determines covered bond ratings using a two-step process: an expected loss analysis and a TPI framework analysis.

EXPECTED LOSS: Moody's uses its Covered Bond Model (COBOL) to determine a rating based on the expected loss on the bond. COBOL determines expected loss as: (1) a function of the probability that the issuer will cease making payments under the covered bonds (a CB anchor event); and (2) the stressed losses on the cover pool assets following a CB anchor event.

The CB anchor for the Kookmin Bank covered bonds is CR assessment plus zero notches, and for the KHFC covered bonds is long-term issuer rating plus zero notches.

The cover pool losses for Kookmin Bank covered bonds, KHFC 2016 CB, KHFC 2017 CB and KHFC 2018 CB are 26.4%, 29.6%, 29.6% and 33.6% respectively. This is an estimate of the losses Moody's currently models following a CB anchor event. Moody's splits cover pool losses between market risk and collateral risk. Market risk measures losses stemming from refinancing risk and risks related to interest-rate and currency mismatches (these losses may also include certain legal risks). Collateral risk measures losses resulting directly from cover pool assets' credit quality. Moody's derives collateral risks from the collateral scores, which for Kookmin Bank covered bonds, KHFC 2016 CB, KHFC 2017 CB and KHFC 2018 CB are currently 8%, 8%, 8% and 9.1% respectively.

The over-collateralisation in the cover pool is 93%, 16%, 16% and 13% as of 30 September 2020 for Kookmin Bank covered bonds, KHFC 2016 CB, KHFC 2017 CB and KHFC 2018 CB respectively, of which Kookmin Bank currently provides 23% and KHFC provides 3% for their respective covered bonds on a "committed" basis. Under Moody's COBOL model, the minimum OC consistent with the current covered bond rating is 19% for Kookmin Bank covered bonds and 0% for KHFC covered bonds respectively. These numbers show that Moody's is not relying on "uncommitted" OC in its expected loss analysis.

For further details on cover pool losses, collateral risk, market risk, collateral score and TPI Leeway across covered bond programmes rated by Moody's, please refer to "Covered Bonds Sector Update", published quarterly.

TPI FRAMEWORK: Moody's assigns a TPI, which is our assessment of the likelihood of timely payment of interest and principal to covered bondholders following a CB anchor event. The TPI framework limits the covered bond rating to a certain number of notches above the CB anchor.

For the Kookmin Bank covered bonds, Moody's has assigned a TPI of Probable. For the KHFC covered bonds, Moody's has assigned a TPI of Improbable.

RATING METHODOLOGY

The principal methodology used in these ratings was "Moody's Approach to Rating Covered Bonds" published in October 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1234823. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:

The CB anchor is the main determinant of a covered bond programme's rating robustness. A change in the level of the CB anchor could lead to an upgrade or downgrade of the covered bonds. The TPI Leeway measures the number of notches by which Moody's might lower the CB anchor before the rating agency downgrades the covered bonds because of TPI framework constraints.

Based on the current TPI of "Probable", the TPI Leeway for the Kookmin Bank covered bonds is three notches. This implies that Moody's might downgrade the covered bonds because of a TPI cap if it lowers the CB anchor by four or more notches, all other variables being equal.

Based on the current TPI of "Improbable", the TPI Leeway for the KHFC covered bonds is three notches. This implies that Moody's might downgrade the covered bonds because of a TPI cap if it lowers the CB anchor by four or more notches, all other variables being equal.

A multiple-notch downgrade of the covered bonds might occur in certain circumstances, such as: (1) a country ceiling or sovereign downgrade capping a covered bond rating or negatively affecting the CB Anchor and the TPI; (2) a multiple-notch downgrade of the CB Anchor; or (3) a material reduction of the value of the cover pool.

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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

Moody's did not use any stress scenario simulations in its analysis.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Joe Wong
Vice President - Senior Analyst
Structured Finance 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

Jerome Cheng
Associate Managing Director
Structured Finance 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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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