MARC AFFIRMS ITS AAA RATING ON WOORI BANK’S RM1.0 BILLION MTN PROGRAMME

MARC has affirmed its AAA rating on Woori Bank’s RM1.0 billion Medium Term Notes (MTN) programme with a stable outlook. The affirmed rating reflects the bank’s strong banking franchise in the Republic of Korea (South Korea) and systemic importance in South Korea as well as its stable funding and liquidity profiles and sound capitalisation. MARC rates the notes at the same level as South Korea, at AAA with a stable outlook, on its national rating scale. MARC sets a country ceiling of ‘AAA’ for ringgit-denominated bonds and notes issued by an entity that is domiciled in and operates mainly in South Korea.

Woori Bank is the key banking entity of Woori Finance Holdings Co Ltd (WFH), a government-controlled entity in which the South Korean government, through Korean Deposit Insurance Corporation (KDIC), currently holds a majority equity stake of about 57%. Woori Bank is the second largest commercial bank in South Korea with consolidated total assets of KRW248.1 trillion as at June 30, 2013, or 13% of the banking system’s total assets. Woori Bank has an entrenched presence in the retail and corporate banking segments in South Korea and has successfully grown organically in its mature domestic market, underpinned by its extensive branch network. As at end-December 2013, the bank operates a total of 993 branches nationwide. MARC opines that as a systemically important bank in South Korea, external support for Woori Bank will remain forthcoming regardless of any changes in Woori Bank’s ownership structure should the South Korean government privatise WFH.

Woori Bank’s core profitability has weakened due to low interest rates amidst modest loan growth. The bank posted lower net income of KRW417 billion for the nine-month financial period ended September 30, 2013 (9M2013) (9M2012: KRW1.3 trillion) on account of a decrease in interest income and a small loss on investment securities. Net interest margin declined to 1.72% in 3Q2013 (4Q2012: 2.27%) following a cut in the benchmark interest rate by the central bank in May 2013. This was exacerbated by the spin-off of the bank’s credit card division, which had higher margins compared to other divisions. Woori Bank’s gross loans on a non-consolidated basis recorded a tepid growth of 2.8% in the first nine months of 2013, in line with weak economic growth.

The bank’s credit costs remain elevated in 9M2013 due to the weakened debt servicing capability of its large corporates. In addition, the bank’s prudent stance in recognising impaired loans has led to the high credit costs. The bank’s non-performing loans (NPL) (loans classified as substandard and below) stood at KRW5.3 trillion as at end-September 2013 on a non-consolidated basis, translating to gross NPL ratio of 2.99%. Gross NPL increased by a sharp 85% from end-2012, mainly attributed to a twofold increase in NPLs in the large corporate segment. MARC observes that the bank’s NPL ratio is higher than the industry average of 1.80% at end-September 2013. With the surge in NPLs, the loan loss coverage ratio fell to 84.5% as at end-September 2013 from over 100% as at year-end 2012.

Despite decreased profitability, the bank registered adequate internal capital generation in 9M2013. Woori Bank remains soundly capitalised and ranks the second most-capitalised bank amongst its domestic peers. Its Tier 1 and total capital ratios improved to 12.0% and 15.3% respectively as of end-September 2013 (end-December 2012: 11.4%; 14.7%), which are mainly attributed to a decrease in risk-weighted assets and issuance of Tier 1 hybrid securities. The bank’s core equity (paid-up capital, retained earnings and reserves) comprises about 85% of its Tier 1 capital, translating to Common Equity Tier 1 capital ratio of about 10%, which is well above the regulatory minimum. Correspondingly, MARC expects Woori Bank to meet the stricter Basel III capital requirements that came into effect on December 1, 2013.

Woori Bank’s funding profile is underpinned by a strong and stable deposit base of mostly retail and commercial deposits. This is attributed to the bank’s strong domestic franchise and branch network in South Korea. The bank continues to focus on low-cost retail deposit gathering with core and time deposits making up 37% and 55% of the bank’s total deposits as at end-September 2013. MARC notes that Woori Bank’s loan-to-deposit ratio rose to 99.6% as of end-September 2013 (2012: 96.4%). The bank’s foreign currency funding still depends on wholesale sources, although the funding profile has improved with the bank terming out its debt maturities. Its foreign currency liquidity profile has also improved as reflected by the higher foreign currency liquidity ratio.

MARC anticipates Woori Bank’s interest margins to stabilise over the next 12 to 18 months as the South Korean central bank is not expected to reduce the benchmark interest rate further. The stable outlook reflects MARC’s expectations that Woori Bank’s credit profile will remain commensurate with the current rating band, supported by proactive oversight by the regulators. 

Contacts: Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my; Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my.

March 4, 2014