RAM Ratings reaffirms Industrial Bank of Korea’s AAA debt rating

Published on 29 June 2011

RAM Ratings has reaffirmed the AAA rating of Industrial Bank of Korea’s (IBK or the Bank) RM3 billion Conventional and/or Islamic Medium-Term Notes Programme, with a stable outlook. The rating reflects IBK’s strategic and public-policy role in relation to South Korea’s small and medium-sized enterprises (SMEs), as well as government support in maintaining the Bank’s solvency under the IBK Act. The Bank’s privileged status is also highlighted by its ability to issue lower-cost debentures in the form of small and medium-industry finance (SMIF) bonds for its funding purposes.

Meanwhile, we do not expect the privatisation of IBK to materialise anytime soon, as the regulators focus on safeguarding the soundness of the South Korean financial system amid concerns over the country’s real-estate sector. While IBK’s privatisation is inevitable in the long run, the process is likely to be a gradual one, in the interest of maintaining financial stability. On this note, we expect the South Korean government to progressively reduce its equity but remain a controlling shareholder. As such, we expect IBK to continue benefiting from strong government support in the medium term.

The slump in the South Korean property market, meanwhile, has negatively affected the construction- and real-estate-related sectors, with real-estate project financing the worst hit. Like most banks in the country, IBK has not been spared from the effects of the downturn. The Bank’s gross non-performing-loan ratio weakened to 1.8% as at end-December 2010 (end-December 2009: 1.4%). At the same time, loan-loss provisions over average gross loans climbed up to 1.4% (end-December 2009: 1.0%), albeit partly to maintain a robust coverage level. While credit losses are expected to be reduced this year amid the new provisioning method under the Korean International Financial Reporting Standards, weaknesses in the construction and real-estate sectors are unlikely to ease in the near term, and could lead to further deterioration in asset quality. IBK’s substantial exposure to the SME sector (79% of its loan portfolio) may also amplify the pressure on its asset quality, given the withdrawal of supportive measures for the sector in 2010.

Reflecting IBK’s weak base of customer deposits, its loans-to-deposits (LD) ratio came up to a high 226.1% as at end-December 2010. Including SMIF bonds issued over the counter to retail clients, the Bank’s adjusted LD ratio stood at 161% as at the same date - still significantly above the industry average of 118.3%. On another note, IBK’s overall and tier-1 risk-weighted capital-adequacy ratios stayed adequate at 12.3% and 8.9%, respectively, as at end-December 2010 (end-December 2009: 11.7% and 8.5%). Although these were below the corresponding 14.6% and 11.6% averages of the South Korean banking system and its AAA-rated peers, we believe that the South Korean government will extend its support should the need arise – as demonstrated by its capital injections during the recent global financial crisis.

Media contact
Amy Lo
(603) 7628 1078
amy@ram.com.my