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Rating Action:

Moody's downgrades six Korean banks' subdebt ratings on higher bail-in risk

 The document has been translated in other languages

05 Sep 2013

Hong Kong, September 05, 2013 -- Moody's Investors Service has downgraded the subordinated debt (subdebt) ratings (lower Tier II) and selected junior subdebt ratings (Upper Tier II) for the Basel II-compliant securities of six Korean banks. At the same time, Moody's has confirmed the subdebt ratings of Industrial Bank of Korea (IBK) and Suhyup Bank but downgraded their junior subdebt ratings to reflect their structural subordination. The banks' senior obligation ratings and their standalone baseline credit assessments were not affected.

The ratings of the subdebt of Kookmin Bank, Hana Bank, Korea Exchange Bank (KEB), Shinhan Bank and Woori Bank were downgraded by two notches, and the same ratings of Busan Bank were downgraded by one notch.

However, they continue to benefit from one to two notches of systemic support uplift. While recognizing the evolving risk profile of subdebt, in this case, Moody's retains a moderate level of systemic support for the affected issuers, which is in contrast to Moody's standard of fully removing government support assumptions from subdebt globally. This considers Korea's demonstrated willingness and fiscal capacity to provide support, in combination with its existing bank resolution regime, as discussed below.

For IBK and Suhyup, the ratings were unaffected, given that they are government-owned banks that serve policy financing roles for the SME and fisheries sectors respectively.

This concludes the review for downgrade of the subdebt of Korean banks that was initiated on 3 June 2013 and follows Moody's request for comment "Moody's Proposed Approach for Rating Certain Bank Contingent Capital Securities and Update to Approach for Rating Bank Subordinated Debt" and the "Global Banks" methodology published on 10 April 2013 and 31 May 2013, respectively.

The rating outlooks of subdebt of all the affected banks are now stable.

A list of affected securities can be found at the end of this press release.

RATINGS RATIONALE

Moody's downgrade reflects the increasing international trend of imposing losses on holders of subdebt securities (creditor "bail-in") as a pre-condition for distressed banks to receive government support. As a consequence, Moody's standard approach globally assumes no material probability of systemic support for these junior instruments, and subdebt ratings are, as a base line, positioned one notch below the banks' BCAs, rather than one notch below the senior unsecured rating.

Moody's recognizes that the Korean government, as an active member of the G20, has expressed some form of implicit international commitment under the Financial Stability Board through joint statements in 2009. As the experience of the global financial crisis has shown that the willingness to provide support can change rapidly, the regulators in Korea may consider the option of imposing losses on subdebt holders when faced with a distressed bank.

Having said this, Moody's continues to attach a moderate probability of support and retains one notch of uplift for the subdebt of Kookmin Bank, Hana Bank, KEB, Shinhan Bank and Busan Bank.

This considers (1) Korea's willingness and fiscal capacity to provide support to distressed banks; (2) the government's track record of bailing out distressed banks in the past, based on the existing bank resolution scheme that provides recourse for creditors to seek compensation; and (3) the risk of potential negative repercussions for bank wholesale funding.

For the subdebt of Woori Bank, Moody's retains two notches of uplift in light of its government stake. The bank is scheduled to be privatized next year.

For the subdebt ratings of IBK and Suhyup, Moody's maintains a high level of systemic support as both banks are more than 50% government owned and have clear policy functions serving the SME and fisheries sectors respectively.

This rating action relates only to Moody's view on the potential for systemic support for the banks' junior securities. It does not reflect any change in the banks' intrinsic credit quality. Moody's continues to incorporate the potential for systemic support into the ratings of their senior obligations.

A detailed rationale explaining our decision can be found in our upcoming special comment entitled "The World Has Changed: The Support Probability for Bank Subordinated Debt in Asia-Pacific Has Significantly Diminished".

RATINGS AFFECTED

Busan Bank (Lead analyst: Hyunhee Park)

Foreign currency subdebt program rating: downgraded from (P)A3 to (P)Baa1

Currently there is no rated subdebt for this program

Hana Bank (Lead analyst: Hyunhee Park)

Foreign currency subdebt program rating: downgraded from (P)A2 to (P)Baa1

Foreign currency junior subdebt program rating: downgraded from (P)A2 to (P)Baa2

Currently there is no rated subdebt for this program

Industrial Bank of Korea (Lead analyst: Hyunhee Park)

Foreign currency subdebt program rating: confirmed (P)A1

Foreign currency junior subdebt program rating: downgraded from (P)A1 to (P)A2

Currently there is no rated subdebt for this program

Kookmin Bank (Lead analyst: Sophia Lee)

Foreign currency subdebt program rating: downgraded from (P)A2 to (P)Baa1

Foreign currency junior subdebt program rating: downgraded from (P)A2 to (P)Baa2

Currently there is no rated subdebt for this program

Korea Exchange Bank (Lead analyst: Hyunhee Park)

Foreign currency subdebt program rating: downgraded from (P)A2 to (P)Baa1

Currently there is no rated subdebt for this program

Shinhan Bank (Lead analyst: Hyunhee Park)

Foreign currency subdebt program rating: downgraded from (P)A2 to (P)Baa1

Foreign currency junior subdebt program rating: downgraded from (P)A2 to (P)Baa2

Currently there is no rated subdebt for this program

Suhyup Bank (Lead analyst: Sophia Lee)

Foreign currency subdebt program rating: confirmed (P)A3

Foreign currency junior subdebt program rating: downgraded from (P)A3 to (P)Baa1

Currently there is no rated subdebt for this program

Woori Bank (Lead analyst: Sophia Lee)

Foreign currency subdebt rating: downgraded from A2 to Baa1

Foreign currency subdebt program rating: downgraded from (P)A2 to (P)Baa1

Foreign currency junior subdebt program rating: downgraded from (P)A3 to (P)Baa2

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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.

Sophia Lee
Vice President - Senior 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

Hyun Hee Park
Analyst
Financial Institutions Group
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 downgrades six Korean banks' subdebt ratings on higher bail-in risk
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