MARC AFFIRMS WOORI BANK’S RM1.0 BILLION MTN PROGRAMME RATING AT AAA; OUTLOOK STABLE

Mar 16, 2012 -

MARC has affirmed its AAA rating on Woori Bank’s RM1.0 billion Medium Term Notes (MTN) Programme with a stable outlook. The affirmed rating reflects the bank’s strong banking franchise in the Republic of Korea (Korea), good earnings generation capacity, sound funding profile and capitalisation, as well as progress made by the bank in strengthening its risk management framework. The rating also takes into account easing asset quality pressures, although MARC remains cautious that improving credit trends could reverse given the prospect of slowing domestic growth. While the impending privatisation of Woori Bank’s financial holding company, Woori Finance Holdings Co. Ltd. (WFH), creates uncertainty about the future ownership of the bank, MARC believes that systemic support for Woori Bank will remain high on account of its high systemic importance to the Korean banking sector as a leading commercial bank. MARC rates the notes at the same level as Korea, at AAA with a stable outlook, on its national rating scale. MARC’s country ceiling for ringgit denominated bonds and notes issued by an entity that is domiciled in and operates mainly in Korea is ‘AAA’.

Woori Bank is the second largest commercial bank in Korea, with total assets of KRW242.5 trillion as at end-December 2011 (FY2011). Woori Bank is the key banking entity of WFH, a government-controlled entity in which the Korean government, through Korean Deposit Insurance Corporation (KDIC), currently holds a majority equity stake of 56.97%. The bank has a strong domestic presence across the retail, commercial and corporate banking segments. The bank has also been actively growing its geographic footprint and leveraging on funding and lending opportunities abroad.

The bank’s improving trend of credit costs and declining loan delinquencies suggests that asset quality pressures have been easing. As at end-2011, the bank’s non-performing loan (NPL) ratio has improved to 1.7%, declining from a high of 3.3% at end-FY2010. The bank’s NPLs have declined in absolute terms after rising sharply in FY2010 as a result of its exposure to troubled SME and real estate project financing segments. The improving NPL trend was also aided in part by sales of NPLs to third parties and workouts of problem corporate loans. Problem loans classified as precautionary and below were 4.5% of total loans at the end of 4QFY2011 as compared to 5.1% of total loans in the immediate preceding quarter. MARC considers Woori Bank to be fairly well-provisioned against losses in their loan portfolio. The bank has been building up loan loss reserve (LLR) buffers, as evidenced by its increasing LLR coverage of NPLs which rose to 143.7% as at end-December 2011.

The bank’s financial performance has improved and is showing signs of stabilising. The bank posted a pre-tax income of KRW2,659 billion for FY2011, 73% up from KRW1,537 billion based on restated IRS numbers for FY2010. Woori Bank’s net interest margin (NIM) has improved considerably in recent financial years, reversing the earlier downtrend. The improvement in NIM reflects an increase in the general level of interest rates on corporate and consumer loans, in line with the upward revision of Bank of Korea’s (BOK) key policy interest rate as well as a decline in the bank’s average cost of funds. A significant part of the improvement in Woori Bank’s earnings performance stems from lower credit costs in respect of its loan portfolio which decreased by KRW596 billion from the previous year. The decline in impairment on credit losses was attributable to an improvement in asset quality, and, to a lesser extent, the application of the International Financial Reporting Standards as adopted by Korea and the Financial Supervisory Service’s (FSS) guideline on regulatory reserves for credit losses.

Woori Bank’s improved profitability and easing asset quality pressures are expected to alleviate pressure on the bank’s capitalisation. The bank’s capital adequacy ratios have declined from end-FY2010 levels but remain sound at 13.8% and 10.7% for its total and tier-1 capital adequacy ratios respectively as at December 31, 2011. The bank’s hybrid capital component of its Tier 1 capital dropped to KRW1,682 billion from KRW2,394 billion a year earlier as a result of the redemption of hybrid securities that were issued to the Korean government in March 2009 to assist the bank’s recapitalisation in the wake of the global financial crisis. MARC views positively the bank’s efforts to build a buffer of loan loss reserves during recent periods, which will place the bank in a stronger position to weather a challenging credit cycle.

MARC views the bank’s deposit base to be sufficiently granular and stable and notes its recent success in increasing its proportion of low-cost demand and savings deposits. The bank’s loan-to-deposit ratio shows an improving trend, declining to 94.8% excluding certificates of deposit as at end-2011 from 97.0% a year earlier, and should position the bank to maintain ongoing compliance with regulatory liquidity requirements.

The stable outlook reflects MARC’s belief that Woori Bank’s credit strengths and recurring profitability should allow it to withstand considerable economic headwinds.

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