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Rating Action:

Moody's affirms ratings of KDB; continues review for upgrade

 The document has been translated in other languages

21 Oct 2014

Hong Kong, October 21, 2014 -- Moody's Investors Service has affirmed the Aa3 senior unsecured debt ratings of Korea Development Bank (KDB).

The outlooks on the ratings are stable.

At the same time, Moody's has kept on review for upgrade KDB's standalone BFSR of D which is equivalent to a baseline credit assessment (BCA) of ba2, in order to consider the pro-forma financial profile, in light of its planned re-merger with Korea Finance Corporation (KoFC, Aa3 stable) on 1 January 2015.

A full list of the affirmed ratings can be found at the end of this press release.

RATINGS RATIONALE

The affirmation of KDB's ratings reflects its status as a policy bank that is wholly owned by the Korean government (Aa3 stable). Its credit profile is underpinned by Article 44 of the KDB Act, which requires the government to replenish any deficit should the bank's reserves prove insufficient.

The rationale for leaving KDB's standalone credit profile unchanged at ba2, reflects the persistent asset quality challenges faced by the bank. Despite its asset quality problems, Moody's notes that ongoing support from the Korean government has led to a relatively high capital ratio, which could be a driver for raising its BCA. However, given the planned merger with KoFC, Moody's needs to take into consideration the post-merger capitalization and other financial metrics. Therefore, Moody's review for upgrade has been extended.

Moody's is concerned about KDB's high level of borrower concentration, which is the cause of its current weak asset quality. The bank's high borrower concentration is reflected in its top-20 group borrower exposure relative to its Tier 1 capital, which stood at 333% as of end-2013, the highest among the Korean banks. Moreover, KDB's policy role leaves it highly exposed to relatively weak borrowers, with problems at some such borrowers resulting in a substantial net loss in FY2013.

Mitigating its asset quality weakness is KDB's solid capitalization, which supports its credit profile; common equity Tier 1 capital ratio was 11.37% as of end-June 2014.

The re-merger with KoFC is a signal that the government retains a strong commitment to KDB and values the policy role it performs, and that capital and other forms of support from the government can be expected.

What Could Change the Rating - Up

Upward pressure on the rating is unlikely unless the sovereign rating is upgraded, as the Aa3 rating assigned to the bank is the same as the sovereign rating. Moody's will likely upgrade the bank's long-term debt and deposit ratings if Korea's sovereign rating is upgraded so long as the deficiency guarantee in the KDB Act is in force.

Moody's ongoing review of the bank's standalone BFSR will focus on the capital position of the merged entity, KDB and KoFC, and the extent to which it's stronger capital position and ongoing capital support from the government offsets its relatively weaker asset quality and liquidity compared to most Korean commercial banks.

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 the losses incurred from its policy function, without a corresponding increase in its capital.

Moreover, we would lower the standalone BFSR if the bank's NPLs exceed 5% of total loans (2.51% as of end-June 2014), its core Tier 1 ratio (excluding hybrid Tier 1 securities) falls below 8%, or if there is a fall in its funding levels.

Affirmed ratings

KDB -- the long-term deposit rating of Aa3; the senior unsecured debt rating/senior unsecured MTN/senior unsecured shelf ratings of Aa3/(P)Aa3/(P)Aa3; short-term bank deposit/commercial paper/MTN program short-term ratings of P-1/P-1/(P)P-1.

KDB, New York Branch -- commercial paper program short-term rating of P-1

KDB, London Branch -- senior unsecured debt rating of Aa3, senior unsecured MTN rating of (P)Aa3, and MTN program short-term rating of (P)P-1

KDB, Singapore Branch -- senior unsecured debt rating of Aa3

The principal methodology used in these ratings was Global Banks published in July 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Korea Development Bank was established in 1954 as a government-owned financial institution pursuant to the KDB Act. The bank's assets totaled KRW174.5 trillion ($173.5billion) as of end-June2014. It is a policy bank mandated to provide long-term funding to corporates in strategically important industries, as well as working capital loans to SMEs, and loans to the high-tech industry and newly growing industries.

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 ratings of KDB; continues review for upgrade
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