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Rating Action:

Moody's upgrades Kyongnam Bank and affirms Busan Bank after successful share swap

 The document has been translated in other languages

29 May 2015

Hong Kong, May 29, 2015 -- Moody's Investors Service has upgraded the long-term deposit rating of Kyongnam Bank to A2 from A3, and has also affirmed the long-term debt and deposit ratings of Busan Bank.

The outlooks on Kyongnam Bank and its long-term deposit rating are stable.

The outlooks on Busan Bank and its long-term debt and deposit ratings are also stable.

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

RATINGS RATIONALE

The upgrade follows the joint announcement on 27 May 2015 by Kyongnam Bank and BNK Financial Group (BNK FG, unrated) that they have successfully completed a share-swap deal.

With the transaction, BNK FG will raise its stake in Kyongnam Bank to 100% from 56.97%. Accordingly, Kyongnam Bank's shareholders will exchange their shares for new BNK FG shares on 4 June.

"The one-notch upgrade positions the deposit ratings of Kyongnam Bank at A2, in line with those of BNK FG's flagship subsidiary Busan Bank. The equalizing of their ratings reflects the increased importance of Kyongnam Bank to BNK FG, given that it now owns 100% of Kyongnam Bank and the increased expectation of support from its sister bank," says Hyun Hee Park, a Moody's Assistant Vice President.

"Kyongnam Bank's adjusted baseline credit assessment of baa1 incorporates two notches of parental support -- via Busan Bank -- from BNK FG. Kyongnam Bank's baseline credit assessment (BCA) is baa3," says Park.

"At the same time, Moody's affirmation of Busan Bank's long-term debt and deposit ratings reflects the consideration that its now full ownership of Kyongnam Bank has not materially changed Busan Bank's risk profile," adds Park.

Busan Bank's ratio of tangible common equity (TCE) to risk weighted assets (RWA) deteriorated as a result of its initial acquisition of Kyongnam Bank's shares. However, this latest transaction to increase ownership to 100% has no material impact on its capital.

BNK FG estimates that it will require only KRW28 million to buy out those shareholders who object to the deal. BNK FG's double leverage will improve by around 2.4 percentage points to around 123% compared to 125.4% at end-2014 as it issues common equity to Kyongnam Bank's shareholders for the share swap.

BNK FG has a high level of double leverage, but we expect internal capital generation at Busan Bank to be strong in light of the bank's high net income to tangible banking assets ratio, which at 0.9% in 2014 was the highest in Korean banking system.

However, the TCE to RWA ratio of Kyongnam Bank is much lower -- 8.5% in 2014 -- and internal capital generation is not as strong as at Busan Bank. If internal capital generation is slower than our expectations -- due to higher dividends or higher growth in RWA -- negative pressure on Busan Bank's BCA would build.

What Could Change the Rating - Up

Busan Bank

Moody's would upgrade Busan Bank's long-term deposit and senior unsecured debt ratings if it were to raise its BCA.

Moody's could raise the BCA based on a combination of improved capitalization and asset quality, while maintaining the current high profitability level with its annual net income to tangible assets at 0.9%, with the following indications: (1) its parent BNK FG's double leverage ratio drops to around 110% (125.4% at end-2014 and its TCE ratio rises above 12%); and (2) its problem loans to total loans improves to 0.5% without substantial write-offs, or sales of non-performing loans.

Kyongnam Bank

An upgrade of Busan Bank's ratings would place upward pressure on Kyongnam Bank's ratings assuming that Moody's continued to judge that group support remained very strong, resulting in the continued equalization of the two banks' adjusted BCA and deposit ratings. Moody's could raise the BCA of Busan Bank for the reasons outlined above

However, Kyongnam Bank's BCA could be raised based on a combination of improved capitalization, profitability, and asset quality, with the following indications: (1) TCE ratio -- after adjusting for double leverage -- rises above 11%; (2) its annual net income to tangible assets rises above 0.9%, the same level with Busan Bank; and (3) its problem loans to total loans improves to 1.0% without substantial write-offs or sales of non-performing loans.

What Could Change the Rating - Down

Busan Bank

Moody's would downgrade Busan Bank's long-term deposit and senior unsecured debt ratings if it lowered its BCA.

Busan bank's BCA could be lowered if: (1) its TCE ratio -- after adjusting for double leverage -- falls below 9%; (2) its annual net income to tangible assets falls below 0.4%, due to a sharp increase in credit losses (0.9% in 2014); or (3) its problem loans to total loans ratio exceeds 1.5% (0.9% as of end-2014).

Kyongnam Bank

Moody's would downgrade Kyongnam Bank's long-term deposit rating if it lowers its BCA and, at the same time, Moody's did not increase its assumptions of affiliate support, or if it lowers Busan Bank's BCA.

Kyongnam Bank's BCA could be lowered if: (1) its TCE ratio falls below 7.0%, (8.5% at end-2014); (2) its annual net income to tangible assets falls below 0.3%, due to a sharp increase in credit losses; or (3) its problem loans to total loans ratio exceeds 3.0 % (2.0% as of end-2014).

SYSTEMIC SUPPORT

Kyongnam Bank's deposit rating incorporates two notches of systemic support uplift from its baa1 adjusted BCA, given Moody's assessment of a very high likelihood of government support for the bank's rated deposits and senior unsecured debt.

Busan Bank's deposit and debt ratings incorporate two notches of systemic support uplift from its baa1 BCA, given Moody's assessment of a very high likelihood of government support for the bank's rated deposits and senior unsecured debt.

Moody's assessment of a very high likelihood of government support for both banks considers: (1) the government's willingness and fiscal capacity to provide support to distressed banks; (2) the government's track record of injecting public funds into banks facing imminent failure, rather than using resolution tools or allowing the institutions to enter into bankruptcy; and (3) the risk of potential negative repercussions for bank wholesale funding. Moody's assumes a very high level of support for both Kyongnam Bank and Busan Bank, considering the significant systemic importance of BNK Group. BNK FG -- via Busan Bank and Kyongnam Bank -- now has a 5% market share in Korea.

While Moody's assesses the probability of government support for the banks' junior obligations as low globally, it sees a moderate probability of support in Korea, resulting in a one-notch uplift to Busan bank's subordinated debt rating.

The subordinated MTN ratings of Busan Bank are rated (P)Baa1.

Upgraded ratings

Kyongnam Bank -

Long-term deposit rating (Foreign currency and Local currency) to A2 from A3

Short-term deposit rating to P-1 from P-2

Adjusted BCA to baa1 from baa3

Affirmed ratings

Busan Bank -

Long-term deposit rating (Foreign currency and Local currency) of A2

Long-term senior unsecured debt rating (Foreign currency ) of A2

Senior unsecured MTN (Foreign currency ) (P)A2

Subordinated MTN (Foreign currency) of (P)Baa1

Short-term deposit rating of P-1

BCA and adjusted BCA of baa1

Kyongnam Bank --

BCA of baa3

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Kyongnam Bank, headquartered in Korea, had consolidated assets of KRW32.8 trillion (US$30.2 billion) as of December 2014. Busan Bank, headquartered in Korea, had consolidated assets of KRW46.4 trillion (US$42.6 billion) as of 31 December 2014.

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.

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.

Hyun Hee Park
Asst Vice President - 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

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 upgrades Kyongnam Bank and affirms Busan Bank after successful share swap
No Related Data.
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