RAM Ratings reaffirms AAA rating of Korea Development Bank’s MTN

Published on 13 November 2014

RAM Ratings has reaffirmed the AAA/Stable rating of Korea Development Bank’s (KDB or the Bank) Conventional and Islamic MTN Programme, with a combined limit of RM3.5 billion and a sub-limit of RM1.0 billion for the Conventional MTN Programme. The rating reflects the high likelihood of support from the Government of South Korea (GoK) (rated AAA(pi)/P1(pi) on RAM’s national scale).

Ultimately owned by the GoK, the Bank plays a strategic role in providing policy lending to spur economic growth and in restructuring financially troubled South Korean companies. The importance of KDB’s role has also been reinforced following the reversal of its privatisation by the current GoK in August 2013, the redesignation of KDB as a public institution in January 2014 and the remerger of the Bank with policy lender Korea Finance Corporation expected by end-2014. Past capital infusions as well as the solvency guarantee from the GoK further underline its strategic importance to the administration.

Given its policy role, which entails financing large corporates with higher credit risks, KDB has weak loan quality and faces significant loan-concentration risk. A hefty impairment charge on loans to troubled shipbuilding and shipping companies under the STX Group had pushed KDB’s credit-cost ratio up from 0.6% in FY Dec 2012 to 2.6% last year while its gross impaired-loan ratio soared from 2.2% to 4.5%. Along with impairments of investments in firms undergoing restructuring, KDB incurred KRW2.3 trillion of pre-tax losses last year. Although KDB’s performance recovered in 1H FY Dec 2014, with KRW563.2 billion of pre-tax profit, we stay cautious on its asset quality and profitability due to the still-challenging outlook on the shipbuilding and shipping sectors, as well as its exposure to other distressed loans.

While potential impairment from troubled credits may hurt KDB’s capital base, its capitalisation has stayed satisfactory under our stress-test analysis. As at end-June 2014, KDB’s tier-1 capital ratio and total capital ratio stood at a respective 11.4% and 13.3%. Meanwhile, KDB’s liquidity profile is comfortable, with KRW83 trillion of liquid assets amply covering its KRW79 trillion of short-term liabilities as at end-June 2014. The Bank’s KRW and foreign-currency liquidity ratios also stood solid at a respective 164.9% and 120.8%. Although the Bank relies heavily on wholesale funding and is a frequent bond issuer, refinancing risk is not viewed as a major issue for KDB due to its proven access to bond funding on the back of the GoK’s support.


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Karin Koh
(603) 7628 1174
karin@ram.com.my