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Rating Action:

Moody's affirms ratings of Korea Development Bank

 The document has been translated in other languages

21 Jun 2016

Hong Kong, June 21, 2016 -- Moody's Investors Service has affirmed the ratings, baseline credit assessment (BCA), adjusted BCA, and counterparty risk assessment (CRA) of Korea Development Bank (KDB) with stable outlook.

The full list of ratings is listed at the end of this press release.

RATINGS RATIONALE

Moody's has affirmed KDB's BCA of ba2 to reflect its view that the bank's capital buffers are sufficient to absorb credit costs related to its exposures to Korea's shipbuilding and shipping industries. In addition, its ba2 BCA sufficiently captures its relatively high asset risk, characterized by credit concentrations and exposure to market risk via its significant holdings of equities.

The affirmation of KDB's ratings reflects Moody's assessment of the extremely high probability of Korean government (Aa2 stable) support for the bank in times of need. In the context of Moody's bank methodology, KDB is considered to be a government-backed issuer in terms of the probability of support. In determining the support probability for KDB, Moody's has considered the explicit legal stipulations in article 32 of the KDB Act that hold the government responsible for KDB's solvency.

On June 8, the Korean authorities announced restructuring plan for shipping and shipbuilding industries and measures for recapitalization of policy banks. According to the announcement, the government will allocate capital in its 2017 budget for KDB to ensure that it maintains a total capital ratio of 13.0%.

Specifically, it will set up a capital fund totaling KRW11 trillion, which the two policy banks -- KDB and The Export-Import Bank of Korea (KEXIM, Aa2 stable) -- can call upon when additional capital becomes necessary as corporate restructuring proceeds.

Over the past several years, rising pressure on asset quality from the shipbuilding and shipping Industries lifted KDB's problem loans ratio -- defined as problem loans to gross loans -- to 4.8% at end-2015 and 5.0% at end-2014 from 3.8% at end-2013. We expect restructuring in these two sectors to result in rising credit costs at KDB.

However, we also estimate that KDB can mitigate pressure on its capital by gains on the sale of its stake in KDB Daewoo Securities Co., Ltd. (Baa2, review for downgrade) and its equity method earnings from Korea Electric Power Corporation (KEPCO, Aa2 stable).

Moody's notes that KDB's financial flexibility is enhanced by its substantial equity holdings acquired during previous financial and market crises at low, distressed prices. However, these equity holdings also expose the institution to market risk. However, pressures on its BCA could increase from further loan disbursements and increasing risk from its equity holdings in the shipbuilding and shipping industries. Moody's expects KDB will continue to support the restructuring of both industries through providing loans and refund guarantees. If future capital increases do not sufficiently compensate for the additional risk incurred from further disbursements, then downward pressure on its BCA will increase.

WHAT COULD CHANGE THE RATINGS UP

Moody's is likely to upgrade the bank's long-term debt and deposit ratings if Korea's sovereign rating is upgraded and the deficiency guarantee in the KDB Act remains in force. The explicit legal stipulation requires the government to replenish any deficit if KDB's reserves prove insufficient to absorb any annual net losses.

Upward pressure on its BCA, while unlikely in the near term, could arise if (1) its TCE ratio improves through internally generated capital; or (2) the three-year average ratio of its net income to tangible assets exceeds 1.0% (about 0.6% at end-2015), without a deterioration in asset quality (KDB reported a problem loans to gross loans ratio of 4.8% at end-2015).

WHAT COULD CHANGE THE RATINGS DOWN

KDB's long-term deposit or debt ratings could be downgraded if (1) the Korean sovereign ratings are downgraded; or (2) there are changes to the KDB Act that diminish the government's responsibility to maintain the bank's solvency;

The bank's BCA could be lowered if: (1) its Common Equity Tier 1 Capital (CET 1) ratio falls below 9.0% (about 11.58% at end-2015); (2) its problem loans to gross loans ratio rises above 6.0% (4.8% at end-2015); (3) there is a large increase in the losses incurred from its policy function without a corresponding increase in capital; or (4) its liquidity coverage ratio falls below the regulatory minimum of 70% (99.2% at end-2015).

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies 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. With KRW309.5 trillion in assets ($287.2 billion) at end-2015, the bank is the largest policy bank in Korea.

List of ratings:

Korea Development Bank

- Foreign currency long-term senior unsecured debt rating of Aa2 affirmed with a stable outlook

- Foreign currency senior unsecured MTN/senior unsecured shelf/backed senior unsecured shelf ratings of (P)Aa2/(P)Aa2/(P)Aa2 affirmed

- Backed senior unsecured debt rating of Aa2 affirmed with a stable outlook

- Local and foreign currency long-term deposit rating of Aa2 affirmed with a stable outlook

- Foreign and local currency short-term deposit rating of P-1 affirmed

- Foreign currency commercial paper rating of P-1 affirmed

- Foreign currency other short-term programme rating of (P)P-1 affirmed

- Foreign currency other short-term rating of 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 ba2 affirmed

- Outlook is maintained at stable

Korea Development Bank, New York Branch

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

- Local currency other short-term programme rating of (P)P-1 affirmed

- Local currency commercial paper rating of P-1 affirmed

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

- The outlook is maintained at stable

Korea Development Bank, London Branch

- Foreign currency long-term senior unsecured debt rating of Aa2 affirmed with a stable outlook

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

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

- Foreign currency other short-term programme rating of (P)P-1 affirmed

- Outlook is maintained at stable

Korea Development Bank, Singapore Branch

- Foreign currency long-term deposit note/CD program rating of Aa2 affirmed with a stable outlook

- Long-term counterparty risk assessment of Aa2(cr) affirmed

- Outlook is maintained at stable

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 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.

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

Graeme Knowd
MD - Banking
Financial Institutions Group
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

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 Korea Development Bank
No Related Data.
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