MARC AFFIRMS THE EXPORT-IMPORT BANK OF KOREA'S MTN RATINGS AT AAA/AAAID; OUTLOOK STABLE

Sep 9, 2011 -
MARC has affirmed its AAA and AAAID ratings on The Export-Import Bank of Korea’s (KEXIM) conventional and Islamic Medium Term Notes Programmes with a combined nominal value of RM3.0 billion. The outlook on the ratings is stable. The ratings reflect KEXIM’s public policy role in supporting the Republic of Korea’s (South Korea) export and import industries, its strong standalone financial profile and its full government ownership. The ratings also receive an uplift from the high likelihood of support from the Korean government. Under the KEXIM Act, the government is required to fund the bank if its reserves are insufficient to cover an annual net loss. MARC opines that support from the Korean government will continue in view of KEXIM’s important role in supporting the growth of Korea’s export-oriented economy and the Korean government’s significant capacity to provide liquidity or capital support.

KEXIM is a specialised bank mandated with the role of an export credit agency (ECA) to support Korean international trade transactions. The bank’s activities mainly comprise export credit, overseas investment credit as well as provision of guarantees. As witnessed during the recent 2008 global financial crisis, KEXIM, in common with other ECAs, played a critical role in keeping trade flows open. KEXIM maintained its momentum of financing for Korean exporters with double-digit loan growth of 10.2% in 2010 (2009: 14.5%). Export credits amounted to a significant 56% of total loans at end-2010 (2009: 60%) underpinned by the export-orientation of the Korean economy. However, the most significant contribution towards loan growth in 2010 was from overseas investment credit afforded mainly to fund overseas ventures of Korean corporates. Overseas investment credit expanded by 32% during the year to account for 33% of total loans at end-2010 (2009: 28%). Going forward, the bank expects total credit expansion to be at a more moderate 5.7% in 2011 on the back of an already enlarged loan book.

Being an export credit agency, KEXIM’s loan portfolio is geographically well diversified, with credit exposures extended across the world. Currency and interest rate risks arising from the loan portfolio have thus far been well managed through the use of derivatives. Moreover, the higher concentration risk on the manufacturing and transportation (mainly shipbuilding) sector credit exposures (collectively 62% of loans at end-2010) is somewhat mitigated by the sound credit profiles of the borrowers comprising strong and established Korean corporations, including leading global shipbuilders.

Apart from lending activities, the bank is also notably involved in the issuance of guarantees and acceptances, which stood at KRW68 trillion at end-2010 compared to KRW42 trillion of gross loans at end-2010. However, the volume of outstanding guarantees and acceptances declined by 10.2% during 2010 (2009: decline of 16.5%) as the volume of new business undertakings, for which these instruments were utilised (especially in shipbuilding), declined in the aftermath of the global economic downturn.

The bank’s gross non-performing loan (NPL) ratio has risen marginally to 1.2% at end-2010 from 1.1% at end-2009. However, KEXIM’s gross NPL ratio is still fairly low in an international context and below the Korean banking sector average of 1.9%. The bank’s NPLs are also well provided for, as indicated by a loan loss reserve cover of 303% at end-2010. Going forward, MARC opines that asset quality is likely to remain under pressure until there is a sustained recovery in the global economy and a corresponding improvement in the fortunes of the Korean corporate sector.

Meanwhile, the bank’s financial performance remained weak in 2010 as credit costs increased significantly amidst an unfavourable economic environment to 1.99% of average assets in 2010 from 1.01% in 2009 and from a much more manageable 0.31% in 2008. KEXIM’s return on assets (ROA) improved to 0.15% in 2010 from 0.07% in 2009 on the back of gains from the disposal of available-for-securities (AFS). Excluding gains from these AFS securities, MARC notes that the bank would have reported a net loss equivalent to 0.87% of average assets in 2010. Considering KEXIM’s public policy role, its core profitability is expected to remain constrained going forward as it has been in the past.

Under the KEXIM Act, the Korean government has an obligation to ensure KEXIM’s ongoing solvency. Accordingly, the government has injected a total of KRW1.85 trillion (approximately RM5.0 billion) from 2008 to 2010 to strengthen the bank’s capital structure. Notwithstanding these capital injections, the bank’s Tier 1 and total capital ratios declined to 9.3% and 10.8% respectively at end-2010 from 9.7% and 11.3% respectively at end-2009 as risk-weighted assets increased by 4.7% during the year as compared to a 5.1% contraction reported in 2009. Nevertheless, MARC derives comfort from the demonstrated willingness of the Korean government to ensure that the bank remains adequately capitalised as a result of its strategic and commercial importance to the Korean economy. The most recent of such capital injections was in April 2011 when the government injected KRW1.0 trillion of capital into the bank.

The stable outlook on KEXIM’s ratings reflects MARC’s expectations that there will be no material change in the bank’s operating or credit profile, and the capacity and willingness of the Korean government to support the bank in the near-to-medium term.

Contacts:
Anandakumar Jegarasasingam, +603-2082 2250/ kumar@marc.com.my;
Ahmad Rizal Ahmad Farid, +603-2082 2253/ arizal@marc.com.my.