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Rating Action:

Moody's assigns A1 to NongHyup Bank, withdraws NACF's ratings

 The document has been translated in other languages

02 Mar 2012

Hong Kong, March 02, 2012 -- Moody's Investors Service has assigned an A1/Prime-1 rating to the foreign currency long-term/short-term issuer ratings of NongHyup Bank (NH Bank).

The full list of ratings assigned to the bank is at the end of the press release.

All the ratings carry a stable outlook.

This is the first time that Moody's has assigned ratings to NH Bank.

At the same time, Moody's has withdrawn the ratings on National Agricultural Cooperative Federation (NACF) due to reorganization.

The rating action follows the reorganization of NACF on 2 March 2012. The reorganization adopted the holding company structure and spun off several financial business units of NACF as separate subsidiaries. These include its banking, life insurance, and nonlife insurance units.

NACF owns two intermediate holding companies: NongHyup Financial Group Inc. and NongHyup Agribusiness Group Inc. NongHyup Financial Group owns stakes in its financial subsidiaries, including NH Bank, and NongHyup Agribusiness Group owns agricultural subsidiaries.

Almost all of the balance sheet items, including all debt rated by Moody's, relating to NACF's credit and banking businesses, were transferred to NH Bank.

RATINGS RATIONALE

The A1 rating of NH Bank incorporates (1) NH Bank's D+ Bank Financial Strength Rating, mapping to a Baa3 Baseline Credit Assessment, and (2) Moody's assessment of a very high probability of government support (a component of joint default analysis, referred to as JDA).

The main drivers of the bank's standalone rating are: (1) strong domestic franchise, (2) modest profitability and asset quality, (3) modest liquidity, and (4) adequate capital adequacy.

The bank has a strong domestic franchise, as it runs the fourth-largest banking operation in Korea with a 13% share in system deposits.

NH Bank's profitability and asset quality have been worse than the industry average since 2008, because of its credit exposure to riskier corporate segments (real estate, construction, shipbuilding, and shipping).

Similar to other domestic banks, NH Bank's funding and liquidity levels are weaker than many banks in Asia, given its 104.1% overall loan-to-deposit ratio in all currencies at end-2011. In particular, its foreign currency loan-to-deposit ratio was above 1,000% at end-2011 (including trade receivables among loans) partly due to its lack of overseas' branches. Nevertheless, the proportion of foreign currency funding in total funding was relatively low at 5.8% for NH Bank, compared with 8% - 14% for major commercial banks in Korea.

NH Bank's Tier 1 ratio is likely to be around 11% in March 2012 after the NACF restructuring, which is similar to its domestic peers. However, its internal capital generation is likely to be constrained, as the bank needs to pay out relatively high dividends to cover a large portion of expenses (including the servicing of debts raised for reorganization) at NongHyup Financial Group Inc. and NACF.

The bank's global local currency deposit rating receives a five-notch uplift from its standalone Baa3, as we believe that NH Bank is very likely to be supported by the Korean government in a systemic crisis.

This view of expected support is underscored by the bank's role in the implementation of the government's agriculture-related financing policies in Korea, as well as its systemic importance in Korea's banking system.

We do not see much likelihood for the bank's long-term deposit or debt ratings to be upgraded in the near future, because its A1 long-term senior debt or deposit rating has already incorporated a five-notch rating uplift due to our assumption of the likelihood of a government support.

The triggers for an upgrade to the bank's standalone rating include (1) the ratio of net income to risk-weighted assets surpassing 1.3% (about 0.5% in 2011) for three consecutive years; and (2) the proportion of short-term foreign currency liabilities to total foreign currency liabilities falling below 60% (74% at December 2011).

We expect that a downgrade of NH Bank's long-term deposit or debt ratings could occur from either a noticeable drop in systemic support from the government, or a downgrade in its standalone rating.

A drop in systemic support could occur if its position in the banking system diminishes, or there are signs that its policy role and special relationship with the government are weakening.

We would consider downgrading NH Bank's standalone rating if: (1) its core Tier 1 capital ratio dropped below 8.5%, (2) its NPL ratio rose above 4%, or (3) the bank posted net losses for two consecutive fiscal years.

RATING COMPARISON BETWEEN NH BANK AND NACF:

The ratings of NH Bank are the same as the previous ratings on NACF, that is before its reorganization. But the baseline credit assessment of NH Bank is a notch higher at Baa3, compared with that of NACF.

When assigning a one-notch baseline credit assessment to NH Bank, we considered two positive developments as a result of the reorganization. First, NH Bank now has its own capital that is in line with the average capital levels of its domestic peers, while the previous credit and banking unit of NACF had not had dedicated capital but relied on overall capital that was also supporting the other operations, such as supply channel services units for agriculture and livestock products.

Second, overall transparency has improved, especially as NH Bank is now a separate legal entity, rather than a business unit of NACF.

The ratings uplift due to our systemic support assumption is five-notches for NH Bank, which is less than the six-notches previously applied for NACF, as the bank's public policy role in the agricultural industry will be narrower than NACF. NH Bank's policy role will be restricted to that of the credit and banking unit in NACF before the reorganization, while the supply channel services for agriculture and livestock products will be run by other legal entities.

Moreover, the rating outlook on NH Bank is stable, while the outlook on NACF was negative, as its overall asset quality indicators have improved. The NPL ratio improved to 1.88% (industry average: 1.36%) at end-2011 from 2.57% (1.90%) a year ago. The NPL coverage ratio also improved to 92.8% at end-2011 from 75% a year ago.

FINANCING FOR THE REORGANIZATION:

The reorganization required new capital of about KRW10.8 trillion - the government provided support worth KRW5 trillion while the NACF contributed KRW5.8 trillion.

Out of KRW5 trillion from the government, KRW1 trillion will likely comprise a contribution of certain assets, such as equity, while the remaining KRW4 trillion took the form of compensating interest expenses.

With the interest expense compensation, the government will compensate all interest expenses on the KRW4 trillion in new debt issued by NACF until 2017. And this could be further extended if the government agrees in 2017.

The government and NACF plan to discuss the details of the KRW1 trillion asset contribution over the next several months, as they still needs to agree on specific terms.

In addition to capital support from the government, NACF has raised about KRW5.8 trillion on its own. Of the KRW5.8 trillion, KRW5.2 trillion came from new debt: KRW4 trillion in borrowing from its mutual credit account, and which NACF operates as reserves belonging to its member co-ops, and KRW1.2 trillion from bond issuance. The remaining KRW0.6 trillion comprised contributions from member co-ops and employees.

The refinancing risk for the KRW4 trillion in borrowings will not be large, as NACF manages the accounts.

The list of NongHyup Bank's ratings are:

- Foreign currency long-term/short-term deposits: A1 and Prime-1;

- Foreign currency long-term issuer: A1

- Foreign currency long-term senior unsecured/ subordinated debt: A1/A2;

- Bank Financial Strength: D+

- Baseline Credit Assessment (BCA)/Adjusted BCA: Baa3/Baa3

NACF was established in 1961 under the Constitution of Korea and the Agricultural Co-operative Law, and operates under the directive of the Ministry for Food, Agriculture, Forestry and Fisheries. NACF's principal role is to act as an umbrella organization for agricultural and livestock co-ops which represent almost all farmers in Korea. Member co-ops, of which there are 1,167, wholly own NACF. NACF, headquartered in Seoul, Korea, had KRW305 trillion (USD265 billion) in assets (including its non-financial operations) as of 31, December 2011.

NongHyup Bank was established as a spin-off of the credit and banking unit of NACF 2 March 2012 when NACF was reorganized and took a holding company structure. NongHyup Bank is governed by the Agricultural Co-operative Law and the Banking Act of Korea. NongHyup Bank is headquartered in Seoul, Korea.

The methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

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

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Young Il Choi
VP - Senior Credit Officer
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 assigns A1 to NongHyup Bank, withdraws NACF's ratings
No Related Data.
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