MARC AFFIRMS ITS AAA AND AAAIS RATINGS ON KEXIM’S CONVENTIONAL AND ISLAMIC MTN PROGRAMMES

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

The ratings on KEXIM are equalised to MARC’s foreign currency sovereign rating of AAA/stable on the Republic of Korea (South Korea) based on the rating agency’s view of a very high likelihood of state support for the bank.  This view takes into account KEXIM’s status as a wholly-owned state policy bank, its developmental role to support the country’s exports and the government’s legal obligation under the KEXIM Act to uphold the bank’s solvency.

KEXIM’s loan book composition reflects its development mandate, with export credit accounting for 52.5% of total loans as at end-June 2016 (1H2016), followed by overseas investment credit at 31.0% and import credit at 5.0%. The bank also extends support to South Korean companies by providing guarantees and by taking equity investments in them. For 1H2016, KEXIM registered a moderate loan growth of 6.6% year-on-year (y-o-y) to KRW72.9 trillion (on excluding the effect of the Korean won depreciation against the US dollar). In the same period, acceptances and guarantees declined by 1.6% y-o-y to KRW64.1 trillion, suggesting that challenging economic conditions have continued to prevail in the country. Over the near term, the bank has lowered its planned credit disbursement to KRW67.0 trillion (2016: KRW69.2 trillion).

KEXIM remains exposed to concentration risk as evidenced by a sizeable 20.2% of its total credit exposure to five borrowers, accounting for 2.4 times its shareholders’ equity as at end-June 2016. In addition, its top three largest borrowers are involved in the Korean shipbuilding industry which remains mired in a sharp downturn. Problematic loans to the shipbuilding industry largely contributed to the spike in the bank’s gross non-performing loans (NPL) ratio to 4.34% as at end-June 2016 (2015: 3.24%). MARC also notes the declining trend of the bank’s loan loss coverage ratio over the past few years to 56.0% as at end-June 2016. This notwithstanding, KEXIM, given its developmental role, is expected to continue to provide financial support to players in the shipping industry.

KEXIM has continued to receive capital support from the South Korean government. During 9M2016, the government injected KRW945.0 billion in cash in KEXIM and provided KRW500.0 billion in shares of Korea Aerospace Industries Ltd through Korea Development Bank (KDB) to the bank. As a result, KEXIM’s tier 1 and total capital ratios increased to 10.2% and 11.4% respectively as at end-September 2016 (1H2016: 8.5% and 10.0%). Additionally, as part of the government’s recent restructuring plan for the shipping and shipbuilding industries, the government will directly inject a further KRW1.0 trillion of capital into KEXIM and create a KRW11.0 trillion recapitalisation fund. The fund is created together with the central bank to boost the capital position of the two state-run banks, KEXIM and KDB, by purchasing contingent convertible bonds to be issued by them. MARC draws comfort from the South Korean government’s repeated and timely action to restore KEXIM’s capitalisation ratios in light of the impact on the bank from the ongoing difficulties in the shipbuilding industry.

For 1H2016, KEXIM registered significantly higher impairment charges of KRW1.8 trillion (1H2015: KRW0.3 billion) on loans and guarantees, resulting in a loss before tax of KRW1.2 trillion (1H2015: profit before tax of KRW60.0 billion). MARC views that the bank’s earnings profile will remain under pressure given the likelihood of further asset quality deterioration.

The stable rating outlook primarily reflects MARC’s expectations on the strong capacity and willingness of the South Korean government to continue supporting the bank.

Contacts: Norehan Ikhlas, +603-2082 2257/ norehan@marc.com.my; Joan Leong, +603-2082 2270/ joan@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.

April 4, 2017