Bangkok--4 Jun--Fitch Ratings
Fitch Ratings has affirmed Korea-based Woori Bank's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Simultaneously, Fitch has upgraded Woori Bank's Viability Rating (VR) to 'bbb+' from 'bbb'. A full list of rating actions is at the end of this rating action commentary.
The upgrade of Woori Bank's VR mainly reflects Fitch's view about rating relativities among Korea's largest commercial banks - two of which are still rated two notches higher - on a forward-looking basis considering recent developments at the system level and bank-specific level. Firstly, Korea's authorities have adopted more aggressive policies to support economic growth and ease the financial burden on borrowers, although such pro-consumer steps have had the effect of constraining the banking system's revenue and growth prospects. This has been reinforced by stricter oversight by the regulators. At the same time, system asset quality has benefited, and none more so than at Woori Bank. This also reflects management's greater focus on reducing risk. Both areas, in which the bank lags peers, have historically constrained Woori Bank's VR.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS, SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's IDRs, National and senior debt ratings, Support Rating and Support Rating Floor reflect Fitch's continued belief that there is extremely high probability that the South Korean government (AA-/Stable) would support Woori Bank, if required. This view is based on Woori Bank's systemic importance as the second-largest bank in Korea, with 13% and 15% of the banking system's loans and deposits respectively.
The Stable Outlook reflects the Stable Outlook on South Korea.
The 'AAA(tha)' rating on Woori Bank's Thai baht-denominated senior unsecured debt is based on Woori Bank's Long-Term Foreign Currency IDR, which is at the same level with Thailand's Long-Term Local-Currency IDR of 'A-'/Stable and corresponds to 'AAA(tha)' on the National Rating scale.
VIABILITY RATING
Woori Bank's VR takes into account its strong franchise in Korea, where it is the second-largest bank by assets and deposits. Woori Bank has consistently maintained sound capitalisation and margins, but recently that has been made more challenging by the operating environment which is putting pressure on sector profitability. However, it also considers the bank's risk controls and asset quality - both of which still lag its large domestic peers - to have improved recently. This reflects positively on management quality, which historically has been compromised by turnover at senior levels. Another key factor is the bank's funding/liquidity profile, with a reliance on foreign currency wholesale funding, although this is not unique to Woori Bank; in fact the bank's funding profile has improved over the past five years.
Its precautionary-and-below (PBL) loans ratio (3.6% at end-2014) compares unfavourably with the commercial bank average (about 2.5%), although it has improved significantly from a peak of 6.3% at end-2010. Woori Bank's growth appetite has declined recently as its management has focused on the sale of KDIC's controlling stake in the bank. That said, a focus on mortgage loans in recent years has seen its loan book expand on average by about 5% a year.
Woori Bank's long-term underlying profitability has weakened due to softer economic growth, falling interest rates, various regulatory-driven costs and continued social and political pressure on the margins and fees of Korean financial institutions. Nevertheless, credit costs have improved and Fitch expects Woori Bank's return on assets to be 0.3%-0.4% over the near term.
The bank is highly likely to be designated a "domestic systemically important bank" (D-SIB) in Korea by the regulator in 2016, meaning the likely imposition of higher capital standards. This, a more disciplined approach to loan growth, and a heightened focus on originating better quality assets than in the past, leads Fitch to expect Woori Bank to progressively strengthen its Fitch Core Capital (FCC) ratio, which was 10.2% at end-2014. Fitch notes the FCC ratio fell from end-2013, but this reflects Woori Bank's simultaneous merger with its parent and re-consolidation with Woori Card rather than any fundamental deterioration in the bank's own capitalisation.
Woori Bank's loans/customer deposits ratio weakened to 125% in 2014 from 118% in 2013, mainly due to the consolidation of Woori Card. Nevertheless, the bank is compliant with local prudential guidelines concerning funding and liquidity. Like its local peers, Woori is dependent upon foreign-currency wholesale funding to support foreign-currency lending, but it is mostly long-term in nature.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Woori Bank's legacy Tier 2 notes are rated one notch below its Long-Term IDR. These notes have minimal non-performance risk relative to the banks' senior unsecured debt. The securities have gone-concern loss absorption features and no coupon payment flexibility. Fitch rates the notes one notch below the anchor rating to reflect their below-average loss-severity relative to senior unsecured instruments as a result of their subordinated status.
Fitch uses the support-driven IDR or the VR (whichever is higher) as the anchor rating for Korea's systemically important banks' Tier 2 instruments (both Basel III Tier 2 and legacy Tier 2 securities) because they will be non-performing when the issuing bank becomes insolvent or defaults, which is similar to the point at which senior debt is considered to be in default, and we expect pre-emptive support to be provided to avoid insolvency.
Woori Bank's legacy hybrid securities are rated four notches below the bank's VR, in line with Fitch's criteria, to reflect their high loss severity (two notches) and non-performance risk (two notches). The hybrid Tier 1 capital securities have limited flexibility over coupon payments despite their going-concern loss absorption feature of the non-cumulative coupon deferral, the key reason for the VR being the anchor rating.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS, SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR
The IDRs, National and senior debt ratings, Support Rating and Support Rating Floor are potentially sensitive to any change in assumptions around the propensity or ability of the Korean authorities to provide timely support to the bank. This might arise if there is a change in the ability of the Korean authorities to provide support. Also, global regulatory initiatives aimed at reducing implicit government support available to banks may cause downward pressure on the ratings.
The ratings on Woori Bank's Thai baht-denominated senior unsecured debt are at the highest end on Thailand's National rating scale. Therefore, there is no upside. The debt rating could be downgraded if Woori Bank's Long-Term Foreign Currency IDR is downgraded below Thailand's Long-Term Local Currency IDR. Alternatively, an upgrade of Thailand's Long-Term Local Currency IDR may also lead to Woori Bank's debt being downgraded.
VIABILITY RATING (VR)
The bank's VR is sensitive to a change in Fitch's assumptions regarding primarily Woori Bank's company profile and how it can mitigate the impact of the operating environment, which will also largely reflect management's future strategy and approach to, risk appetite, growth and capital.
It could be upgraded if there is a significant improvement in its risk appetite or in management quality, which would likely manifest in sustained improvement in asset quality. That said, even though there have been some improvements recently, today's upgrade already anticipates some further improvements, thus limiting the prospects of a further upgrade in the near term.
The VR could be downgraded if there is a significant and unexpected increase in risk appetite (including from above-peer growth), which heightens the prospects of future deterioration in loan quality and noticeable erosion in its capitalisation. Negative action could also be taken in the event of further senior management turnover and concerns that it would impact the bank's strategy and governance.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Woori Bank's legacy Tier 2 subordinated debt ratings are broadly sensitive to the same considerations that might affect Woori Bank's Long-Term IDR, which is the anchor for such securities.
Woori Bank's legacy hybrid securities ratings are broadly sensitive to the same considerations that might affect Woori Bank's VR, which is the anchor for such securities.