Hong Kong, August 05, 2020 -- Moody's Investors Service has confirmed the ratings and assessments of
four Korean regional banks.
The four banks are Busan Bank; Daegu Bank, Ltd.;
Jeju Bank; and Kyongnam Bank.
The outlooks on all ratings of Busan Bank, Daegu Bank and Kyongnam
Bank are changed to negative from ratings under review. For Jeju
Bank, the ratings outlook is changed to stable from ratings under
review.
Today's rating action concludes the review for downgrade initiated
on 24 March 2020.
A list of all affected ratings and assessments is provided at the end
of this press release.
RATINGS RATIONALE
The confirmation of the four Korean regional banks' ratings and
assessments takes into account Moody's expectation that (1) asset
quality will remain relatively stable; (2) economic capitalization
will recover in the next 2-3 years after a temporary deterioration,
because loan growth should normalize from the second half of 2020;
and (3) earnings will remain low but stable without a significant increase
in credit costs.
The negative impact from lower global demand and domestic consumption
has been somewhat offset by the substantial liquidity support provided
by the Korean government (Aa2 stable) via fiscal and financial policies
to aid small and medium-sized enterprises (SME) and other borrowers
affected by the coronavirus pandemic. For example, banks
offered new loans, maturity extensions and reduced interest rates
to borrowers directly affected by the outbreak on their existing loans
and guarantees. Fiscal policy measures included a supplementary
budget to support hospitals, businesses and low-income households.
The Bank of Korea also cut its base rate to a historically low level,
lowering funding costs for SMEs and sole proprietor business loan borrowers.
These measures in turn support the asset quality and profitability of
the four banks, which have high exposures to SMEs.
Moody's does not expect a material asset quality deterioration even
after the expiration of above support measures, because the banks
have been de-risking their loan portfolio in the past 2-3
years. In particular, the banks have increased the proportion
of higher quality borrowers and lowered their exposures to risky sectors
such as construction, shipbuilding, shipping, steel,
chemical and auto parts manufacturers. Additionally, a gradual
recovery in global demand and lower debt servicing burdens amid the low
interest rate environment will also support banks' asset quality.
Finally, despite the Financial Services Commission's easing
of regulatory funding and liquidity requirements, Moody's
expects the banks to keep their funding and liquidity stable at levels
close to the original regulatory requirements, because the relaxation
is only temporary until the end of June 2021.
OUTLOOK
As an open economy with high trade dependence and tight integration into
global supply chains, Korea is vulnerable to a prolonged slowdown
to domestic and external economic activity
Against this background, the negative outlooks on Busan Bank,
Daegu Bank and Kyongnam Bank reflect the risk of asset quality deterioration
if domestic or global economic activity weakens beyond Moody's current
expectation. This is due to the banks' concentrated exposures
to SMEs in the tourism, services, food and beverage,
and retail sectors, as well as their high exposure to the manufacturing
sector because the banks are located in home regions that are manufacturing
bases for the aforementioned risky sectors.
The stable outlook on Jeju Bank reflects Moody's view that affiliate
support from Shinhan Bank (Bank Deposit: Aa3, Senior Unsecured:
Aa3, BCA: a3, stable), via Shinhan Financial Group
Co., Ltd. (Shinhan FG, A1 stable) will be sufficiently
strong to offset downward pressure on Jeju Bank's credit profile.
Furthermore, the operating environment of Jeju Bank has improved
with a gradual recovery in domestic tourism to Jeju Island.
BUSAN BANK
Busan Bank's baa1 BCA reflects its (1) strong profitability, as
indicated by its average net income/tangible banking assets of 0.6%
from 2014 to 2019, which was higher than that of its domestic commercial
bank peers; (2) moderate capitalization, with tangible common
equity / risk weighted assets ratio higher than the average regional bank
peers; and (3) strong funding because of its strong relationship
with customers in its home region.
Its Adjusted BCA, which incorporates no affiliate support,
is at the same level as its BCA.
Busan Bank's long-term deposit ratings of A2 incorporate two notches
of uplift based on Moody's assumption of a very high probability of support
from the Korean government in times of need. Moody's view of government
support takes into consideration the systemic importance of Busan Bank
and its parent, BNK Financial Group Inc. (BNK FG),
to their home region. The very high likelihood of government support
also takes into account the Government of Korea's strong capacity to provide
support, and the government's track record of bailing out distressed
banks.
DAEGU BANK, LTD.
Daegu Bank's baa1 Baseline Credit Assessment (BCA) takes into account
the bank's (1) stable asset risk, driven by improvements in
the quality of its loan portfolio, despite a slowdown in the economic
growth of the bank's home region of Daegu and Gyeongbuk Province;
(2) modest but stable capitalization compared with that of other regional
bank peers; (3) modest but stable profitability; and (4) strong
funding and stable liquidity, supported by its strong franchise
in its home market.
Its Adjusted BCA, which incorporates no affiliate support,
is at the same level as its BCA.
Daegu Bank's long-term deposit ratings of A2 incorporate two notches
of uplift based on Moody's assumption of a very high probability of support
from the Korean government in times of need. Moody's view of government
support takes into consideration the systemic importance of the regional
banks to their respective regions. The very high likelihood of
government support also takes into account the Government of Korea's strong
capacity to provide support, and the government's track record of
bailing out distressed banks.
JEJU BANK
Jeju bank's baa3 Baseline Credit Assessment (BCA) reflects its (1)
strong deposit funding and liquidity; (2) adequate capitalization;
(3) weak asset quality; (4) modest profitability; and (5) high
geographic concentration in the Jeju Island.
The recovery in Jeju Island is vulnerable to how the coronavirus pandemic
is contained, and on whether domestic and ultimately overseas tourism
recovers. A key risk to Jeju Bank's ratings is that of a
significant flare-up of coronavirus infections that leads to widespread
social distancing measures and a drop in tourism to Jeju Island.
Such a scenario could pressure the bank's asset quality and profitability.
In light of this, Jeju Bank's BCA incorporates one notch of negative
qualitative adjustment to reflects its high geographic and sector concentration
in Jeju Island.
Jeju Bank's Adjusted BCA of a3 incorporates a three-notch
of affiliate support based on Moody's assumption of a very high
probability of support from Shinhan Bank via its parent, Shinhan
FG, in times of need. Jeju Bank's Adjusted BCA is positioned
at the same level as Shinhan FG's notional BCA of a3.
Jeju Bank's long-term deposits ratings of A2 incorporate a one-notch
uplift from the bank's Adjusted BCA of a3, based on Moody's
assessment of a high probability of support from the Government of Korea
if necessary. Moody's view on government support takes into
consideration the systemic importance of Jeju Bank to Jeju Island despite
its small size. The high likelihood of government support also
takes into account the Government of Korea's strong capacity to provide
support, and the government's track record of bailing out distressed
banks.
KYONGNAM BANK
Kyongnam Bank's long-term deposits ratings of A2 rating incorporates
its baa2 Baseline Credit Assessment (BCA) and a one-notch uplift
for affiliate support from BNK FG, resulting in an Adjusted BCA
of baa1. The identical ratings of Kyongnam Bank and Busan Bank
reflect the importance of Kyongnam Bank to BNK FG. Moody's
incorporates a two-notch uplift for government support to reflect
the very high probability of support for Kyongnam Bank from the Government
of Korea, if necessary.
Kyongnam Bank's baa2 BCA reflects its (1) modest capitalization;
(2) strong funding because of its close relationships with customers in
its home region; and (3) modest asset quality and profitability relative
to domestic peers because of its high exposure to problem industries.
Kyongnam Bank's Adjusted BCA incorporates a one-notch uplift for
affiliate support from BNK Financial Group Inc. Moody's expectation
of very high support from Kyongnam Bank's sister bank, Busan Bank,
via BNK FG reflects (1) BNK FG's 100% ownership of both banks;
(2) the fact that the banks share the same group brand, BNK;
and (3) the banks share reputational risks because of the proximity of
their primary operating regions.
Kyongnam Bank's long-term ratings incorporate two notches of uplift
based on Moody's assumption of a very high probability of support from
the Korean government in times of need. Moody's view of government
support takes into consideration the systemic importance of the regional
banks to their respective regions. The very high likelihood of
government support also takes into account the Government of Korea's strong
capacity to provide support, and the government's track record of
bailing out distressed banks.
For all four banks, their counterparty risk ratings (CRR) are positioned
at A1/P-1, and the bank's counterparty risk assessment (CRA)
is positioned at A1(cr)/P-1(cr). Korea does not have an
operational bank resolution regime. Moody's therefore applies a
basic Loss Given Failure approach in rating Korean banks. The starting
point for the CRR and CRA are one notch above the bank's Adjusted BCA,
to which Moody's then adds the government support uplift. For Busan
Bank, Daegu Bank, and Kyongnam Bank, the CRR and CRA
benefit from two notches of government support. For Jeju Bank,
the CRR and CRA benefit from one notch of government support.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD MOVE THE RATINGS UP
For Busan Bank, Daegu Bank, and Kyongnam Bank, their
ratings upgrade is unlikely given their negative outlooks. However,
their outlooks could change to stable if macro-economic conditions
in Korea improve and banks maintain sound credit metrics in line with
their current ratings and assessments.
For Jeju Bank, Moody's could upgrade its long-term
ratings if the operating environment for Korean banks improves,
resulting in an upgrade of Korea's Macro Profile. Jeju Bank's
long-term ratings may also be upgraded if financial strengths of
Shinhan Bank or Shinhan FG improves, resulting in a higher level
of affiliate support.
Moody's could also upgrade Jeju bank's ratings if its BCA is upgraded.
The bank's BCA could in turn be upgraded if (1) the bank's profitability
improves with its net income/tangible assets remaining above 0.8%
on a sustained basis, while maintaining adequate capitalization;
and (2) asset risk improves significantly with its problem loans/total
loans dropping to below 0.5% without substantial write-offs
or the sale of nonperforming loans (NPLs).
WHAT COULD MOVE THE RATINGS DOWN
Moody's could downgrade all four banks' long-term ratings
if the operating environment for Korean banks deteriorates, resulting
in a downgrade of Korea's Macro Profile. Any change in regulations
that weakens the framework for government support could result in a downgrade
of the banks' ratings. Moody's could also downgrade
the banks' ratings if their BCAs are downgraded.
Moody's could also downgrade their BCAs if (1) asset risk rise significantly
with problem loans to gross loans ratio rising by more than 150 basis
points due to a prolonged domestic and global economic downturn;
(2) banks' economic capitalization deteriorate significantly with
nominal leverage deteriorating significantly from large credit losses
or high loan growth; and/or (3) the banks' profitability weaken
significantly with net profit to tangible assets deteriorating to lower
than 0.3% on a sustained basis.
In addition to above, for Jeju Bank, Moody's could downgrade
its ratings if the financial strengths of Shinhan Bank or Shinhan FG materially
declines, resulting in reduced level of affiliate support.
For Kyongnam Bank, its long-term ratings may be downgraded
if Busan Bank's BCA is downgraded.
The principal methodology used in these ratings was Banks Methodology
published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Busan Bank, headquartered in Busan, South Korea, had
total assets of KRW56.9 trillion (USD46.7 billion) at the
end of March 2020.
Daegu Bank, Ltd. is headquartered in Daegu, and had
total assets of KRW55.2 trillion (USD45.3 billion) at the
end of March 2020.
Jeju Bank is headquartered in Jeju Island with total assets of KRW6.2
trillion (USD5.1 billion) at the end of March 2020.
Kyongnam Bank, headquartered in Changwon, South Korea,
had total assets of KRW40.0 trillion (USD35.6 billion) at
the end of March 2020.
LIST OF AFFECTED RATINGS
Busan Bank
- Long-term deposit rating (foreign currency and local currency)
of A2 confirmed, outlook changed to negative from ratings under
review
- Short-term deposit rating (foreign currency and local
currency) of P-1 confirmed
- Long-term senior unsecured debt rating (foreign currency)
of A2 confirmed, outlook changed to negative from ratings under
review
- Senior unsecured MTN (foreign currency) (P)A2 confirmed
- Long-term counterparty risk rating (foreign currency and
local currency) of A1 confirmed
- Short-term counterparty risk rating (foreign currency
and local currency) of P-1 confirmed
- Long-term / Short-term counterparty risk assessment
of A1(cr)/P-1(cr) confirmed
- Subordinated MTN (foreign currency) of (P)Baa2 confirmed
- Subordinate (foreign currency) of Baa2 (hyb) confirmed
- Baseline credit assessment and adjusted baseline credit assessment
of baa1 confirmed
- Outlook changed to negative from ratings under review
Daegu Bank, Ltd.
- Long-term deposit rating (foreign currency and local currency)
of A2 confirmed, outlook changed to negative from ratings under
review
- Short-term deposit rating (foreign currency and local
currency) of P-1 confirmed
- Long-term senior unsecured debt rating (foreign currency)
of A2 confirmed, outlook changed to negative from ratings under
review
- Long-term counterparty risk rating (foreign currency and
local currency) of A1 confirmed
- Short-term counterparty risk rating (foreign currency
and local currency) of P-1 confirmed
- Long-term / Short-term counterparty risk assessment
of A1(cr) and P-1(cr) confirmed
- Baseline credit assessment and adjusted baseline credit assessment
of baa1 confirmed
- Outlook changed to negative from ratings under review
Jeju Bank
- Long-term deposit rating (foreign currency and local currency)
of A2 confirmed, outlook changed to stable from ratings under review
- Short-term deposit rating (foreign currency and local
currency) of P-1 confirmed
- Long-term counterparty risk rating (foreign currency and
local currency) of A1 confirmed
- Short-term counterparty risk rating (foreign currency
and local currency) of P-1 confirmed
- Long-term / Short-term counterparty risk assessment
of A1(cr) and P-1(cr) confirmed
- Baseline credit assessment of baa3 confirmed
- Adjusted baseline credit assessment of a3 confirmed
- Outlook changed to stable from ratings under review
Kyongnam Bank
- Long-term deposit rating (foreign currency and local currency)
of A2 confirmed, outlook changed to negative from ratings under
review
- Short-term deposit rating (foreign currency and local
currency) of P-1 confirmed
- Long-term counterparty risk rating (foreign currency and
local currency) of A1 confirmed
- Short-term counterparty risk rating (foreign currency
and local currency) of P-1 confirmed
- Long-term / Short-term counterparty risk assessment
of A1(cr) and P-1(cr) confirmed
- Baseline credit assessment of baa2 confirmed
- Adjusted baseline credit assessment of baa1 confirmed
- Outlook changed to negative from ratings under review
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.
For ratings issued on a program, series, category/class of
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The first name below is the lead rating analyst for this Credit Rating
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