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Rating Action:

Moody's places four Korean regional banks' ratings and assessments under review for downgrade

 The document has been translated in other languages

24 Mar 2020

Hong Kong, March 24, 2020 -- Moody's Investors Service has today placed all ratings and assessments of four Korean regional banks on review for downgrade.

The four banks are Busan Bank; Daegu Bank, Ltd.; Jeju Bank; and Kyongnam Bank.

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

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The Korean banking sector has been one of the sectors affected by the shock given their exposures to highly affected regions and industries. In addition, Korea has emerged as a new epicenter for coronavirus outbreak since late February. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

The review for downgrade reflects Moody's expectation that Korea's economic growth will slow as well as the risk of a deterioration in the banks' credit quality due to the breadth and severity of the shock from the coronavirus outbreak. In particular, Moody's expects the four banks' asset quality could deteriorate through their concentrated exposures to the affected regions, namely Daegu and Gyeongbuk, and highly affected sectors, namely small- and medium-sized enterprises (SMEs) in the tourism, services, food and beverage, and retail sectors. The banks are also exposed to the manufacturing sector, which is vulnerable to a potential global contraction in trade or disruptions to global supply chains.

Thus far, Korea has not closed its borders nor introduced a stringent lockdown, with economic activities allowed to continue and social distancing encouraged. While a significant supply shock has as a result so far been avoided domestically, Korea is nevertheless vulnerable to the global slowdown in growth as an open economy with a high trade dependence and its tight integration into global supply chains. Korea is also vulnerable to a potential new wave of confirmed cases imported from overseas.

The government has announced various forms of financial support for SMEs directly affected by the outbreak, including new loans, maturity extensions and reduced interest rates for existing loans and guarantees. The government has also announced a supplementary budget to support hospitals, businesses and low-income households. In addition, the Bank of Korea has cut its official interest rate to a historical low of 0.75%.

These measures aim to combat the economic damage from the coronavirus outbreak by providing liquidity and lowering borrowing costs, and therefore will delay the recognition of asset quality deterioration. Whether these measures will translate into materially higher non-performing loans will depend on the severity and duration of the outbreak.

Daegu Bank's operations are concentrated in Daegu and Gyeongbuk, the two provinces accounting for 85% of confirmed coronavirus infections in Korea as of 24 March, with loan and deposit market shares of 25% and 37% respectively. Strong social distancing policies in these two provinces have resulted in a significant contraction in consumer spending, while Gyeongbuk is also a major manufacturing hub, as reflected in Daegu Bank's heavy loan exposures to the manufacturing and service sectors.

Jeju Bank's operations are concentrated in Jeju Island, with loan and deposit market shares of 25% and 37% respectively. Jeju Island's economy is heavily dependent on tourism, with wholesale, retail, transportation, accommodation and food services accounting for 19% of gross value added in 2018. The travel restrictions as such have had a significant impact on the island's economy, with tourist arrivals to the island contracting by 43% in February 2020 from a year ago.

Busan Bank, Daegu Bank and Kyongnam Bank are regional banks with high exposures to SMEs and more than 20% of loans in the manufacturing sectors. Daegu Bank and Kyongnam Bank are also exposed to the shipbuilding, shipping, construction, project financing, steel and auto parts manufacturing sectors, which are either highly affected by the current outbreak or are undergoing multiyear restructuring.

Busan is also a major transportation hub as Korea's largest port. Transportation accounted for 7% of Busan's gross value added, which means a significant slowdown in trade or air traffic could negatively affect the region. Busan Bank has the highest market share in Busan, with a 26% loan and 33% deposit market share at the end of June 2019

Kyongnam Bank is most exposed to Ulsan and Gyeongnam area, with a 24% loan market share in the Ulsan and Gyeongnam regions as of July 2019. Ulsan has a high exposure to manufacturing as a production base for the automotive, shipbuilding and petrochemical industries. Gyeongnam is also exposed to the shipbuilding and machinery manufacturing industries. Therefore, a significant disruption to global supply chains or reduced export demand could weaken asset performance in the Ulsan and Gyeongnam regions.

Moody's expects asset risk will rise for the four regional banks due to their respective concentrated exposures to regions and sectors either directly affected by the coronavirus or highly exposed to sectors highly vulnerable to a slowdown in global trade. The policy rate cut to historical low levels will further affect the banks' profitability.

Jeju Bank's long-term deposits ratings incorporate a three-notch uplift for affiliate support and a one-notch uplift for government support. Jeju Bank's Adjusted BCA of a3 incorporates Moody's assumption of a very high probability of support from its parent company in times of need, resulting in a three-notch uplift from its BCA of baa3. Jeju Bank's Adjusted BCA is positioned at the same level as Shinhan Financial Group Co., Ltd.'s (A1 stable) notional BCA of a3.

Kyongnam Bank's long-term ratings incorporate 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 Financial Group reflects (1) BNK Financial Group'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.

Busan Bank's, Daegu Bank's and 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. Jeju Bank's long-term ratings incorporate a one-notch uplift for government support.

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.

Moody's does not have particular governance concerns for the affected banks, and their governance practices follow those that are stipulated in the act governing their respective entities.

WHAT COULD CHANGE THE RATINGS DOWN

Moody's review for downgrade of the affected banks' ratings and assessments will focus on the quality of the banks' SME and single office home office (SOHO) borrowers loans in regions directly affected by the coronavirus outbreak, and on the resultant impact on the banks' asset quality and profitability. The review will also focus on the effectiveness of domestic and global policy responses in supporting the domestic and global economies. The review will also focus on whether the global spread of the coronavirus results in further disruptions to domestic economic activity.

Moody's could downgrade the affected banks' ratings if the banks' BCAs are downgraded.

Moody's could downgrade the banks' BCAs if the review leads us to expect: (1) asset risk or profitability are likely to weaken significantly due to a prolonged domestic and global economic downturn; and/or (2) the banks face challenges in maintaining stable funding and liquidity profiles.

For Kyongnam Bank, its long-term ratings may be downgraded if Busan Bank's BCA is downgraded.

WHAT COULD CHANGE THE RATINGS UP

Given that the ratings are on review for downgrade, an upgrade is unlikely.

However, the ratings and assessments could be confirmed if macro-economic conditions in Korea improve and the affected banks maintain sound credit metrics in line with their current ratings and assessments.

For Jeju Bank, the review will also focus on the likelihood of affiliate support. Its ratings currently incorporate a three-notch uplift for likely affiliate support from Shinhan Financial Group, and Moody's could consider an additional notch if Jeju Bank's BCA is downgraded.

The principal methodology used in these ratings was Banks Methodology published in November 2019. 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 KRW56.8 trillion (USD47.5 billion) at the end of September 2019.

Daegu Bank, Ltd. is headquartered in Daegu, and had total assets of KRW53.0 trillion (USD44.3 billion) at the end of September 2019.

Jeju Bank is headquartered in Jeju Island with total assets of KRW6.0 trillion (USD5.0 billion) at the end of September 2019.

Kyongnam Bank, headquartered in Changwon, South Korea, had total assets of KRW39.1 trillion (USD32.8 billion) at the end of September 2019.

LIST OF AFFECTED RATINGS

Busan Bank

- Long-term deposit rating (foreign currency and local currency) of A2 placed under review for downgrade, outlook changed to ratings under review from stable

- Short-term deposit rating (foreign currency and local currency) of P-1 placed under review for downgrade

- Long-term senior unsecured debt rating (foreign currency) of A2 placed under review for downgrade, outlook changed to ratings under review from stable

- Senior unsecured MTN (foreign currency) (P)A2 placed under review for downgrade

- Long-term counterparty risk rating (foreign currency and local currency) of A1 placed under review for downgrade

- Short-term counterparty risk rating (foreign currency and local currency) of P-1 placed under review for downgrade

- Long-term / Short-term counterparty risk assessment of A1(cr)/P-1(cr) placed under review for downgrade

- Subordinated MTN (foreign currency) of (P)Baa2 placed under review for downgrade

- Subordinate (foreign currency) of Baa2 (hyb) placed under review for downgrade

- Baseline credit assessment and adjusted baseline credit assessment of baa1 placed under review for downgrade

- Outlook changed to ratings under review from stable

Daegu Bank, Ltd.

- Long-term deposit rating (foreign currency and local currency) of A2 placed under review for downgrade, outlook changed to ratings under review from stable

- Short-term deposit rating (foreign currency and local currency) of P-1 placed under review for downgrade

- Long-term senior unsecured debt rating (foreign currency) of A2 placed under review for downgrade, outlook changed to ratings under review from stable

- Long-term counterparty risk rating (foreign currency and local currency) of A1 placed under review for downgrade

- Short-term counterparty risk rating (foreign currency and local currency) of P-1 placed under review for downgrade

- Long-term / Short-term counterparty risk assessment of A1(cr) and P-1(cr) placed under review for downgrade

- Baseline credit assessment and adjusted baseline credit assessment of baa1 placed under review for downgrade

- Outlook changed to ratings under review from stable

Jeju Bank

- Long-term deposit rating (foreign currency and local currency) of A2 placed under review for downgrade, outlook changed to ratings under review from stable

- Short-term deposit rating (foreign currency and local currency) of P-1 placed under review for downgrade

- Long-term counterparty risk rating (foreign currency and local currency) of A1 placed under review for downgrade

- Short-term counterparty risk rating (foreign currency and local currency) of P-1 placed under review for downgrade

- Long-term / Short-term counterparty risk assessment of A1(cr) and P-1(cr) placed under review for downgrade

- Baseline credit assessment of baa3 placed under review for downgrade

- Adjusted baseline credit assessment of a3 placed under review for downgrade

- Outlook changed to ratings under review from stable

Kyongnam Bank

- Long-term deposit rating (foreign currency and local currency) of A2 placed under review for downgrade, outlook changed to ratings under review from stable

- Short-term deposit rating (foreign currency and local currency) of P-1 placed under review for downgrade

- Long-term counterparty risk rating (foreign currency and local currency) of A1 placed under review for downgrade

- Short-term counterparty risk rating (foreign currency and local currency) of P-1 placed under review for downgrade

- Long-term / Short-term counterparty risk assessment of A1(cr) and P-1(cr) placed under review for downgrade

- Baseline credit assessment of baa2 placed under review for downgrade

- Adjusted baseline credit assessment of baa1 placed under review for downgrade

- Outlook changed to ratings under review from stable

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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, CFA
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.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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