RAM Ratings has reaffirmed the AAA/Stable rating of Korea Development Bank's (KDB or the Bank) Conventional and Islamic MTN Programmes, with a combined limit of RM3.5 billion and a sub-limit of RM1

Published on 02 December 2016

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

Wholly owned by the GoK, the Bank plays a strategic role in providing policy lending to assist the development of the South Korean economy, and leading the restructuring of financially troubled South Korean corporates. The reversal of its privatisation by the current GoK, the remerger of the Bank with policy lender Korea Finance Corporation, and the redesignation of the merged entity as a public institution further underline KDB's importance to the GoK.

In view of its policy role, KDB's asset quality and profit performance are inherently weaker than those of commercial banks. As at end-June 2016, KDB's gross impaired-loan (GIL) ratio had nudged up to 6.0% (end-December 2015: 4.8%; end-December 2014: 5.0%), driven by sector-wide downturns in shipbuilding and shipping. At the same time, heftier impairment provisions had elevated its credit-cost ratio to an annualised 2.2% in fiscal 2016 (fiscal 2015: 2.0%; fiscal 2014: 1.4%). Nonetheless, the Bank achieved an exceptional pre-tax profit of KRW2.7 trillion in fiscal 2015 (fiscal 2014: KRW366 billion), mainly attributable to increased contributions from its associates, which had more than offset the impairment charges. In 1H fiscal 2016, substantial contributions from Korea Electric Power Co Ltd shored up KDB's pre-tax profit of KRW771 billion, despite hefty provisions that had weighed down its profitability.

As at end-June 2016, the Bank's common-equity tier-1 and total capital ratios stood at a respective 12.4% and 14.7%. That said, KDB's capitalisation may be stressed by the higher credit risks of its exposures, and the end of the 10-year grace period for lower risk weights on its equity investments acquired before 2008. That said, the Bank benefits from frequent and timely capital injections from the GoK, albeit typically in the form of shares in government-owned companies. KDB's liquidity position remains comfortable, with respective liquidity coverage and foreign-currency liquidity ratios of 136% and 121% as at end-March 2016. Refinancing risk is not deemed a major issue for the Bank despite its reliance on wholesale funding, given its proven access to bond financing on the back of government support.

Analytical contact                                        Media contact
Choong Andrea                                              Padthma Subbiah
(603) 7628 1115                                            (603) 7628 1162
andrea@ram.com.my                                    padthma@ram.com.my