MARC AFFIRMS ITS AAA/AAAID RATINGS ON THE EXPORT-IMPORT BANK OF KOREA’S CONVENTIONAL AND ISLAMIC MTN PROGRAMMES

MARC has affirmed its ratings of AAA/AAA_ID on The Export-Import Bank of Korea’s (KEXIM) Conventional and/or Islamic Medium-Term Notes (MTN) programmes with a combined nominal value of RM3.0 billion and AAA on KEXIM’s RM1.0 billion MTN programme. The outlook on the ratings is stable.

The affirmed ratings incorporate MARC’s assessment of support uplift from the government of the Republic of Korea (South Korea) to KEXIM’s standalone rating. The assessment is based on KEXIM’s public policy role as an official export credit agency of South Korea and the government’s obligation to uphold the bank’s solvency. The rating agency continues to maintain foreign currency sovereign rating of AAA/Stable on South Korea based on the country’s well-diversified economy, steady fiscal policies and sound capacity to service foreign debt. These factors are underpinned by political, institutional and regulatory stability in the country.

MARC regards KEXIM’s standalone credit strength as very strong. Established in 1976 by the South Korean government, the bank has played an important role in the country’s economy by providing export and import credits, overseas investment credits and guarantee facilities to support South Korean companies. The revised Export-Import Bank of Korea Act (KEXIM Act) in December 2013 has further broadened KEXIM’s mandate to include non-loan financial programs such as equity investments, bond guarantees and external debt guarantees. MARC believes that the expanded mandate will allow the bank greater operational flexibility to accommodate the increasingly diversified requirements of South Korean companies. In addition, the revised KEXIM Act has increased the bank’s authorised share capital to KRW15 trillion from KRW8 trillion, which will provide additional headroom for capital injections to support any increase in lending activities.

KEXIM’s lending portfolio, however, expanded at a weak pace of 1.7% on an annualised basis in the six-month period ended June 30, 2014 (1H2014) as compared to 12.6% in 2013. The slower growth rate was mainly due to translation of outstanding foreign currency loans to the stronger Korean won; foreign currency loans accounted for 64.4% of the bank’s loan book as at end-1H2014 (2013: 64.1%). Notwithstanding the effect of foreign currency translation, the lower disbursements for export credit and overseas investment credit by 4% and 10% respectively in 1H2014 had tempered the overall loan growth rate.

MARC also notes that the weaker demand for credit conforms to the lower real export growth rate of the South Korean economy of 4.1% (2013: 4.3%). Export credit remained the largest component of the bank’s loan book at 56.0% (2013: 53.3%), followed by overseas investment credit at 33.7% (2013: 34.2%) while the proportion for import credit continued to be modest at 4.5% (2013: 4.1%). The acceptances and guarantees extended by KEXIM to complement the bank’s lending activities, grew by 6.3% on an annualised basis to KRW55.3 trillion as at end-June 2014 (2013: KRW53.7 trillion). KEXIM’s loans portfolio remains concentrated in the manufacturing industry (52.1% of the loan book), consistent with the bank’s role in supporting the export of South Korea’s capital goods. The bank continues to have fairly large single borrower credit exposures, mainly in the shipbuilding industry. Credit exposures for KEXIM’s five largest borrowers inclusive of loans and guarantees extended to affiliates amounted to KRW21.9 trillion, or 2.4x of its shareholders’ equity as at end-June 2014.

The bank’s gross non-performing loans (NPL) ratio rose to 1.70% as at end-June 2014 (2013: 1.51%) on mainly higher impairment in the transportation segment. At the same time, the loan loss provision declined to 88% (2013: 173%). The decline is due to a reversal amounting to KRW1.0 trillion following a loan-to-equity swap on two shipbuilding companies, which led to a loan loss provision of KRW1.4 trillion (2013: KRW2.4 trillion). In spite of the challenging conditions in the shipbuilding industry, MARC understands that KEXIM will continue with its policy to extend loans to the industry. KEXIM has sustained a sound performance on its acceptances and guarantees segment with the proportion classified as substandard and below remaining low at 0.2% of total as at end-2013.

For the nine-month financial period ended September 2014 (9M2014), pre-tax profits increased to KRW179 billion as compared to KRW48 billion as at end-9M2013 due primarily to lower credit cost of KRW329 billion (9M2013: KRW265 billion). KEXIM’s profitability may come under pressure over the near term as loan growth slows and asset quality weakens. Nonetheless, KEXIM is likely to subordinate its profitability goals to public policy objectives. Capitalisation levels, as reflected by common equity tier 1, tier 1 and total capital ratio of 10.0%, 10.0% and 11.2% respectively as at end-June 2014 (end-December 2013: 10.4%, 10.4% and 11.6% respectively), remains satisfactory. The South Korean government injected fresh capital in January and July 2014, amounting to KRW130 billion and KRW380 billion respectively, resulting in the bank’s paid-in capital increasing to KRW7.7 trillion as at end-September 2014 (end-December 2013: KRW7.2 trillion). The government’s continued support underscores the bank’s good access to funding from international debt capital markets and foreign banks.

The stable rating outlook reflects MARC’s expectations that there will be no material changes in the bank’s operating and credit profile, and the capacity and willingness of the South Korean government to support the bank in the near to medium term.

Contacts: Oo Chin Kai, +603-2082 2260/ chinkai@marc.com.my; Ezra Vendargon, +603-2082 2257/ ezra@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my. 

March 26, 2015