MARC ASSIGNS AAA RATING TO KEXIM’S PROPOSED RM1.0 BILLION MTN PROGRAMME; AFFIRMS ITS AAA/AAAID RATINGS ON THE EXISTING RM3.0 BILLION DEBT PROGRAMMES; OUTLOOK STABLE

Jan 19, 2012 -
MARC has assigned its AAA rating on The Export-Import Bank of Korea’s (KEXIM) proposed RM1.0 billion Medium Term Notes (MTN) Programme. At the same time, the agency has affirmed its AAA and AAAID ratings on KEXIM’s conventional and Islamic MTN Programmes with a combined nominal value of RM3.0 billion. The outlook on the ratings is stable.

The ratings reflect KEXIM’s key role in executing the Republic of Korea (Korea) government’s foreign trade and investment policies through facilitating and financing Korean exports and overseas investments as the country’s official export credit agency (ECA). The ratings also incorporate the ECA’s legal status as a special governmental financial institution, its full ownership by the Korean government, and the government’s responsibility to cover the bank’s annual losses beyond its reserves under the KEXIM Act. MARC believes that the Korean government has strong incentives to provide timely financial assistance if and when needed. Additionally, the government’s strong support for KEXIM has been borne out by capital injections in the past as well as of late. 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. Accordingly, the long-term ratings benefit from support-driven rating uplift from KEXIM’s stand-alone creditworthiness which MARC assesses as ‘very strong’.

KEXIM’s activities mainly comprise export credit, overseas investment credit as well as provision of guarantees. The continuing significance of KEXIM’s role as Korea’s official ECA is reflected in the relatively rapid expansion in its loan portfolio; total outstanding loans have more than tripled to KRW47,994 billion as at September 30, 2011, from KRW15,051 billion as of end-December 2006. Export credits constitutes KEXIM’s most significant lending activity at 58% of total loans at end-June 2011; however, overseas investment credits have become an important component of the bank’s policy-based operations. Overseas investment credits, which consist of loans to finance overseas investments and projects of Korean companies, accounted for 34% of the bank’s total loans as at end-June 2011.

Apart from lending activities, the bank is also notably involved in the issuance of acceptances and guarantees, which stood at KRW60,092 billion as of end-June 2011 with a credit exposure of KRW40,365 billion. The majority of guarantees issued are project-related and comprise advance payment guarantees and performance guarantees issued to overseas importers of Korean goods and services to cover monies advanced to Korean exporters and to support the performance by Korean exporters of their contractual obligations respectively. The manufacturing sector accounted for 76.9% of the bank’s total guarantee commitments as of end-June 2011. KEXIM’s export credits are heavily concentrated in Asia at 84% of its total outstanding loan credits as of end-June 2011. KEXIM’s high sector concentration risk with respect to manufacturing and transportation (mainly shipbuilding) sectors which collectively comprised 64% of loans at end-June 2011 and individual large credit exposures is somewhat mitigated by the sound credit profiles of its borrowers comprising strong and established Korean corporations, which notably include the country’s major shipbuilders.

KEXIM’s gross non-performing assets (NPA) of 0.7% as at end-June 2011 is low on an absolute basis as well as in the international context. The bank's NPA ratio had increased significantly in FY2008 through FY2010 with the onset of global financial crisis and ensuing credit quality pressure. Loan loss provisioning in respect of the bank’s guarantee and acceptance portfolio allowances increased substantially in FY2010. During the six months to June 30, 2011 (1HFY2011), credit quality shows signs of stabilising with loans and guarantee and acceptance classified as sub-standard, doubtful and bad increasing by a mere 0.8% (FY2010: 36.1%). The bank’s NPAs are well provided for as indicated by a loan loss reserve cover of 329% as of June 30, 2011. MARC notes reversals amounting to KRW10 billion of provisions for loan losses during 1HFY2011 primarily due to improved asset quality as well as a decrease of loans classified as non-performing by 39% to KRW523 billion to end-June, down from KRW854 billion as of December 31, 2010. KEXIM’s ability to sustain its current asset quality metrics well into 2012 will be dependent on the resilience of the Korean export sector’s performance, which in turn will be highly sensitive to economic conditions in the key markets of Korean exporters financed by KEXIM.

The bank recorded a substantial improvement in its financial performance for the nine months ended September 30, 2011 (9MFY2011), mostly as a result of increased dividend income from Korea Exchange Bank and a decline in credit costs as evidenced by reversals of provisions and decreased loan loss provisioning, and increased dividend income. KEXIM posted a net income of KRW331 billion compared to a net income of KRW165 billion for the preceding year’s corresponding period. In comparison, 9MFY2010’s financial results had depended significantly on gains arising from the disposal of available-for-sale securities and gains on derivative valuation. KEXIM’s low profitability, which is indicated by its pre-crisis return on assets (ROA) of 0.90% in 2007, reflects the bank’s public policy-orientation as opposed to profit-oriented business.

The Korean government has demonstrated a continuing high level of commitment to provide capital injections in order to support KEXIM’s lending to Korean exporters. The government injected a total of KRW1,100 billion of new capital during 2011, increasing its paid-in capital to KRW6,259 billion as of December 31, 2011. As of June 30, 2011, the bank’s Tier 1 and total capital ratios were 10.8% and 12.2% respectively, up from December 31, 2010 levels of 9.3% and 10.8%. The demonstrated willingness of the Korean government to ensure that the bank remains soundly capitalised relative to its risk profile is also viewed as fundamental to KEXIM’s continued ability to fund itself in international capital markets and through borrowings from foreign banks.

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

Contacts:
Sakinah Ali, +603-2082 2272/ sakinah@marc.com.my;
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my;
Milly Leong, +603-2082 2288/ milly@marc.com.my.