MARC AFFIRMS ITS AAA RATING ON WOORI BANK’S RM1.0 BILLION MTN PROGRAMME

Jan 17, 2013 -

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 strength and resilience of the bank’s strong banking franchise in the Republic of Korea (Korea), good earnings generation capacity, sound funding profile and capitalisation, as well as ongoing upgrading of its risk management systems and practices. Woori Bank continues to demonstrate its ability to generate profitable growth in its home market by broadening its product range and extending its customer reach. Its balanced lending and deposit growth, its strategy to achieve a more balanced business mix and focused expansion of its international operations to support the international activities of customers in Korea remain supportive of its credit quality.

Nonetheless, MARC believes that the potential for credit costs to trend higher remains given the trend of rising household and corporate loan delinquency amid weakening economic growth momentum and pockets of vulnerability in the Korean economy such as the buildup in household debt, real estate market slump and the general weakening in the operating performance of Korea’s corporate sector. The ratings also take into account MARC’s view that Woori Bank is a systemically important bank that would likely receive some external support, if needed, due to its leading position in retail deposits, and retail and corporate lending.

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 non-consolidated total assets of KRW238.0 trillion as at end-December 2011. Woori Bank is the key banking entity of Woori Finance Holdings Co., Ltd (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. Woori Bank’s strategy of offering a broad range of financial products has enabled it to grow organically in its mature domestic market without adding undue risk.

While MARC’s outlook for the Korean banking sector remains stable, looking ahead, the rating agency believes that Woori Bank will face the challenge of limiting the impact of slower economic growth or an economic downturn on its asset quality. Given signs of rising delinquency in the banking sector’s SME loans, large corporate loans and household loans, MARC expects impairments and credit costs to rise moderately in the coming quarters. Any deterioration and associated increase in provisioning should be moderated by the bank’s comfortable loan loss reserve (LLR) buffers.

As at end-September 2012, the bank’s non-performing loans (NPL) (substandard and below loans) ratio was 1.87% on a non-consolidated basis. Woori Bank’s earlier efforts to clean up its loan book saw its NPL ratio fall to 1.65% at end-2011 from a high of 3.34% at end-2010. The bank’s NPLs have risen in absolute terms relative to end-2011 due to a pick-up in NPLs in the large corporate, household and SME segments. Problem loans classified as precautionary and below were 4.6% of total loans, at the end of 3Q2012, slightly worse off than the 4.5% seen at end-2011. MARC considers Woori Bank to be fairly well-provisioned against losses in its loan portfolio with LLR coverage of 131.3% as at end-September 2012.

Competitive pressures continue to keep margins in Woori Bank’s banking operations at a moderate level, with a return on total assets of 0.59% in 2011 and under 0.50% in 2009 and 2010. The bank has sustained its cost-to-income at levels that have helped the bank to protect its operating profitability. Woori Bank posted a record consolidated net profit of KRW2.07 trillion in 2011 on the back of a widening net interest margin (NIM) and significantly lower credit costs. The bank reported lower net income of KRW1.27 trillion for the first nine months of 2012 (9M2012) on account of its narrowing lending-deposit rate spread, lower non-interest income and sharply lower gains on investment securities.

Over the next 12 to 18 months, MARC expects lower interest margins and potentially higher credit costs will exert pressure on Woori Bank’s profitability and internal capital generation. Nonetheless, this is partly mitigated by the bank’s demonstrated ability to generate adequate core earnings from its corporate and retail banking operations. Woori Bank’s fairly resilient recurrent earnings generating capacity continues to be supportive of growth in its core capital base. The bank’s capital adequacy ratios have improved from end-2011 levels; its total and tier-1 capital adequacy ratios remain sound at 14.6% and 11.4% respectively as of end-September 2012. The bank is well positioned for Basel 3 capital requirements given its equity base that is mostly composed of common equity.

Woori Bank’s funding profile is anchored by a stable customer deposits base and decreasing reliance on wholesale funding. The bank’s loan-to-deposit ratio continues to be maintained within its domestic regulatory authorities’ cap of 100%, helped partly by Woori Bank’s continuing active efforts to expand its deposit base. Excluding certificates of deposit, Woori Bank’s loan-to-deposit ratio improved to 94.1% as at end-September 2012 compared to 94.8% as of year-end 2011. MARC views positively the bank’s funding of its lending growth with customer deposits.

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;

Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my