KEXIM Benefits from Lower Cost of Funding

01 Jun 2016

Credit and Relative Value Idea

           

KEXIM Benefits from Lower Cost of Funding

Highlights/Updates:

Export-Import Bank of Korea (KEXIM) has recently issued USD2.5bn senior notes – 10y at YTM at 2.625% (T10+82.5bps), 3y at 1.796% (T3+77.5bps) and 3y FRN at Libor3M+70bps – benefiting from falling yields since the beginning of the year. Yield for the off-the-run 10y (KEXIM 3.25% 11/25) declined 63bps since its issuance in Nov-15, and the z-spread tightened 23bps from the high of 116bps seen February 2016. The new USD2.5bn Senior would increase KEXIM’s total senior funding by c. 5%, and would reduce the weighted average coupon by c. 5bps to 3.24%, based on our back-of-the-envelope estimation. 

Outlook for KEXIM remains stable premised on its strong linkage with the government given its policy roles, the fact that it is wholly-owned by the government and receives explicit solvency support from the government under the KEXIM Act. In spite of the negative outlook by Moody’s on the Korean banking sector and amid the deteriorating asset quality notably in the corporate sector, KEXIM’s close relationship with the government mitigates its relatively weak fundamental metrics:

·         Weak profitability: Net interest margins have historically remained below the industry average (currently at 1.50%), although it has improved to 0.77% in FY15 (FY14: 0.61%).

·         Deteriorating asset quality: Gross NPL jumped to 5.76% in FY15, from 5.01% in the previous year. Provisioning reserves are only at 53% of total NPLs.

·         Moderate capitalization: Total capital ratio stood at 10.13% in FY15, below peers’ average of 13%. KEXIM will be required to improve its capitalization to meet the minimum regulatory requirement of 10.5% by 2019 (including capital conservation buffer of 2.5%).

Bond Details:

Bond	KEXIM 2.625% 5/26 (Issued Price:99.79; YTM: 2.649%, T10+82.5bps)	KEXIM 1.75% 5/19 (Issued Price:99.866; YTM: 1.798%, T3+77.5bps)
Amount Outstanding	USD1.0bn	USD1.0bn
ISIN	US302154CC16	US302154CB33
Ratings	Aa2/NR/AA; Stable
Key Terms	Senior Unsecured

Relative Value Commentary:

We view that the new KEXIM 5/19 and 5/26 appear tightly priced at 1.798% and 2.649% respectively, in relation to similarly rated KDB. KDB ‘20 provides attractive term premiums of c.30bps at 2.10% for additional c.1y tenure over KEXIM 5/19; while KDB 9/25 is merely 4bps lower at 2.61%, compared to KEXIM 5/26. In the USD senior space, we prefer the senior from Australian banks with their recent issuances of Westpac 5/26 and CBA 5/26 which have widened to 2.95%. Fundamentally, both Aussie banks possess stronger capitalization (total capital of 14%) and healthier asset quality (gross NPA of 0.3-0.4%).