RAM Ratings reaffirms NongHyup Bank’s AAA debt rating

Published on 25 November 2013

RAM Ratings has reaffirmed the AAA/Stable rating of the senior notes (the Notes) issued under NongHyup Bank’s (NH Bank or the Bank) MTN Programme of up to RM3.3 billion (2008/2023). Both NH Bank and its ultimate parent, National Agricultural Cooperative Federation (NACF), are co-obligors for the Notes, on a joint and several basis.

The rating reflects the very high likelihood of financial support from the Government of South Korea (GoK) to both NACF and NH Bank, given their strategic roles and systemic importance. There is a proven track record of government support, in the forms of annual budget allocations, capital injections, and significant deposit placements. NACF is the policy arm of the GoK in the implementation of agricultural policies. Meanwhile, NH Bank is a systemically important bank in South Korea, commanding about 12.5% of the banking sector’s deposits, and the sole provider of agricultural policy loans in the country. As NH Bank is the core profit generator of NACF in supporting the latter’s non-profit functions, the credit link between these 2 entities is strong.

NH Bank’s gross impaired-loan ratio had increased to 2.4% as at end-June 2013 (end-December 2012: 1.8%), mainly due to the deterioration of its real-estate project-finance (real-estate PF) loans. We are of the view that the Bank’s asset quality will remain susceptible to the performance of the construction, real-estate PF and shipping industries, which has been challenging since the global financial crisis.

NH Bank’s profitability has been weak, partly a result of the brand-usage fees payable to NACF. In 1H FY Dec 2013, the Bank’s return on assets declined to an annualised 0.1%, primarily attributable to lower margins following several rounds of interest-rate cuts in South Korea and heftier impairment charges. The Bank’s sound capitalisation, with a common equity tier-1 capital ratio of 11%, is expected to provide a sufficient buffer against potential credit losses.

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Lim Yu Cheng

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yucheng@ram.com.my