May 17, 2017 / 4:31 AM / 2 months ago

Fitch Affirms Shinhan Bank at 'A'; Outlook Stable

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(The following statement was released by the rating agency) SEOUL, May 17 (Fitch) Fitch Ratings has affirmed South Korea-based Shinhan Bank's Long-Term Issuer Default Rating (IDR) at 'A'. The Outlook is Stable. Fitch has also affirmed Shinhan's Viability Rating at 'a'. A full list of rating action is at the end of this commentary. KEY RATING DRIVERS IDRS, VIABILITY RATING AND SENIOR DEBT The bank's IDRs, Viability Rating and senior debt ratings reflect its strong franchise and prudent risk appetite, backed by a stable management team and strong capitalisation. It also takes into account the bank's improving, but challenging, operating environment, sound loan quality and, like the rest of Korea's banking system, a modest liquidity and funding profile by international standards, especially in foreign currency, which is mitigated by ordinary support from local authorities. The Stable Outlook reflects Fitch's continued expectation that Shinhan will deliver a broadly stable and consistent performance amid the low interest rate environment. Shinhan has taken tighter control of loan growth following its slightly more aggressive risk-appetite in 2014 and 2015. Focusing on the traditional commercial banking business, the bank has generated consistent performance through the economic cycle under the stable management that has a prudent risk appetite. Fitch expects Shinhan's underlying profitability, measured by operating profit/risk-weighted assets, to marginally improve to 1.5% in 2017 (2016: 1.3%). Shinhan's Fitch Core Capital ratio has been undermined by the capital floor since 2014, which cut the ratio by about 110bp to 13.1% as of end-2016. Shinhan's reported risk-weighted assets will continue to be inflated given its focus on low-risk assets and the benign credit cost environment over the previous few years. Fitch expects the adjusted Fitch Core Capital ratio - that is, without capital-floor impacts - to remain strong at around 14% for the next couple of years due to its low loan growth target, which is around the nominal GDP growth rate. Fitch believes Shinhan's ratio of loans classified as precautionary and below under the local regulator's loan-quality category will remain at a low -1% for the next two years, better than the commercial bank average of 1.7% at end-2016. Its significantly higher reserves for impaired loans of 122% at end-2016 compared with the commercial bank average of 82% should buffer Shinhan against abrupt shocks. Commercial lenders, including Shinhan, have focused on household loans and the property leasing sector following the buoyant local property market since mid-2014. Shinhan's customer loans/deposits ratio - after adjusting for loans to and deposits from financial institutions - improved noticeably by 9pp to 111% in 2016, as abundant liquidity drove customer deposit growth of 13%. Fitch expects the ratio to improve further in the near-term given modest loan growth prospects. The nation's strengthened foreign-currency reserve position, at close to 100% of external liabilities, should serve as a large buffer to the banking sector's weak foreign-currency funding profile relative to international peers. SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating and Support Rating Floor reflect Fitch's continued belief of an extremely high probability of support from the South Korean government (AA-/Stable), if required. This view is based on Shinhan's systemic importance as one of the country's largest commercial banks, holding 13% of the banking system's total loans and 16% of deposits. SUBORDINATED DEBT Shinhan's Basel III compliant Tier 2 debt is rated two notches below its IDR. This reflects Fitch's poor recovery expectations due to the notes' subordinated status and because they are to be fully and permanently written-off upon hitting the point of non-viability. Fitch uses the support-driven IDR or Viability Rating, whichever is higher, as the anchor rating for Korea's systemically important banks' Tier 2 instruments, including those for Shinhan. This is because the Tier 2 instruments will be non-performing or will reach a point of non-viability when the issuing bank becomes insolvent or defaults. This is similar to the point at which senior debt is considered to be in default and Fitch expects pre-emptive support to be provided to avoid insolvency. Shinhan's notes have minimal non-performance risk relative to its senior unsecured debt. For more details on Fitch's approach to rating Basel III-compliant Tier 2 notes, see the non-rating action commentary <a href="https://www.fitchratings.com/site/pressrelease?id=883114"> Fitch: Korean Basel III Terms Become More Creditor Friendly, dated 26 September 2014. RATING SENSITIVITIES IDRS, VIABILITY RATING AND SENIOR DEBT The bank's IDRs, Viability Rating and senior debt ratings are sensitive to a change in Fitch's assumptions about Shinhan's company profile, risk appetite and financial profile. The ratings could be upgraded if there is a sustainable and significant improvement in the bank's financial strength and company profile. The ratings could be downgraded if there is a significant increase in the bank's risk appetite, including rapid growth or weakened loan quality, leading to erosion of its capitalisation. The downside to the IDR would be limited to one notch, as the current Support Rating Floor for Shinhan is 'A-'. SUPPORT RATING AND SUPPORT RATING FLOOR Support Ratings and the Support Rating Floor may be sensitive to any change in Fitch's assumptions about the propensity or ability of the Korean authorities to provide timely support to the bank. This might arise if there is a change in the Korean authorities' ability to provide support. Furthermore, global regulatory initiatives aimed at lowering implicit government support available to banks may cause downward pressure on the ratings. Fitch expects the local regulator will propose a draft revision to its resolution framework to add a bail-in feature in 2H17. However, it remains to be seen how strong the language will be and how feasible it will be to enforce a bail-in in practice. The revision has already been postponed due to domestic political turmoil that has arisen since last fall and the consequent presidential election in May 2017. SUBORDINATED DEBT The ratings on the Basel III-compliant Tier 2 securities are sensitive to the same considerations that might affect Shinhan's Long-Term IDR, which is currently driven by its Viability Rating. The rating actions are as follows: Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F1' Viability Rating affirmed at 'a' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A-' Long-Term senior unsecured debt affirmed at 'A' Subordinated Basel III compliant Tier 2 debt affirmed at 'BBB+' Contact: Primary Analyst Heakyu Chang Senior Director +82 2 3278 8363 Fitch Australia Pty Ltd, Korea Branch 9F Kyobo Securities Building 97, Uisadang-daero, Yeongdeungpo-Gu Seoul 07327, South Korea Secondary Analyst Matt Choi Associate Director +82 2 3278 8372 Committee Chairperson Parson Singha, CFA Senior Director +66 2108 0151 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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