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Rating Action:

Moody's confirms Daegu Bank's ratings, outlook negative, concluding review for downgrade

 The document has been translated in other languages

17 May 2018

Hong Kong, May 17, 2018 -- Moody's Investors Service has confirmed Daegu Bank, Ltd.'s long-term local and foreign currency deposit and foreign currency senior unsecured ratings of A2 and changed the outlook on the ratings to negative.

The bank's baseline credit assessment (BCA), adjusted BCA, long-term and short-term Counterparty Risk Assessments, and short-term local and foreign currency deposit ratings were also confirmed

The rating outlook is changed to negative from rating under review for downgrade.

Today's rating action concludes the review for downgrade started on Daegu Bank on 10 November 2017.

The review was initiated following DGB Financial Group's announcement on 8 November of its decision to acquire an 85.32% equity stake in Hi Asset Investment and Securities from Hyundai Mipo Shipyard for KRW450 billion. DGB FG is the parent holding company of Daegu Bank.

Please refer to "Moody's reviews for downgrade Daegu Bank's ratings following DGB Financial Group's announcement to acquire Hi Investment and Securities," published on 10 November 2017.

Moody's extended the review for downgrade on 9 February 2018 to obtain additional information because the transaction was pending regulatory approvals.

A list of all affected ratings and assessments is provided at the end of this press release.

RATINGS RATIONALE

The confirmation of Daegu Bank's BCA of baa1 takes into account the bank's (1) lower asset risk on the improving operating environment of the bank's home region and slower loan growth since 2016; (2) weak capitalization compared to its domestic peers with a BCA of baa1; (3) strong and stable profitability relative to its domestic peers; and (4) stable funding and liquidity profiles, supported by its close relationships with customers in its home region.

Daegu Bank's lower asset risk is driven by the improvement in its operating environment with a recovery in manufacturing production growth.

In addition, Daegu Bank has pre-emptively managed its large exposure to the increasingly risky auto sector -- which has recently seen slowing production -- by reducing its exposure to borrowers with weaker internal ratings.

Also, Daegu Bank's Korean Won-denominated loan growth slowed to an average of 5% in 2016-17 from 13% in 2014-15. Its asset risk, measured as problem loans to gross loans, improved to 0.87% at the end of 2017, from 1.03% at the end of 2016, and has continuously improved from 1.35% at the end of 2014.

Although Moody's does not expect immediate pressure on the bank's capital, the negative outlook nevertheless reflects Daegu Bank's current level of capitalization.

This level is modest relative to that of its domestic peers with its BCA of baa1, as well as the possible weakening of its capitalization if the bank raises its dividend payout to DGB FG.

The double leverage ratio of DBG FG could rise if DGB FG funds the rest of the acquisition by debt in addition to the KRW150 billion in Additional Tier 1 capital securities it issued in February 2018.

Furthermore, Daegu Bank had raised its dividend payout to 34% in 2017 from 30% in 2016.

WHAT COULD CHANGE THE RATINGS UP

An upgrade of Daegu Bank's A2 long-term bank deposit and senior unsecured debt ratings is unlikely in the near term, given the negative outlook. We would consider changing the outlook to stable if there is positive pressure on its BCA.

Upward pressure on the BCA could develop if (1) the bank's Tangible Common Equity (TCE) capital ratio is maintained at a level consistent with a BCA of baa1; or (2) the 3-year average of the bank's net income/tangible assets exceeds 1.0%, both on a sustained basis without a deterioration in asset quality.

WHAT COULD CHANGE THE RATINGS DOWN

We would downgrade Daegu Bank's long-term deposit and senior unsecured debt ratings if the bank's BCA is downgraded.

The bank's BCA could be downgraded if (1) the operating environment for Korean banks deteriorates, resulting in a downgrade of Korea's Macro Profile; (2) the bank's TCE capital ratio falls below 12%; (3) the bank's annual net income/tangible assets falls below 0.5% on a sustained basis, owing to a sharp increase in credit losses; or (4) the bank's problem loans/gross loans rises above 1.6%.

The principal methodology used in these ratings was Banks published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Daegu Bank, Ltd. is headquartered in Daegu, and had total assets of KRW48.3 trillion (USD45.1 billion) at the end of 2017.

LIST OF AFFECTED RATINGS

- Long-term local currency and foreign currency deposits ratings confirmed at A2 with outlook changed to negative from rating under review for downgrade

- Foreign currency senior unsecured rating confirmed at A2 with outlook changed to negative from rating under review for downgrade

- Short-term local currency and foreign currency deposits ratings confirmed at P-1

- Baseline credit assessment (BCA) and adjusted BCA confirmed at baa1

- Long-term counterparty risk assessment confirmed at A1(cr)

- Short-term counterparty risk assessment confirmed at P-1(cr)

- Outlook is changed to negative from rating under review for downgrade

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.

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
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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