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
