Oct 23 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Standard Chartered Bank Korea Limited's (SCBK) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AA-' and affirmed its Support Rating at '1'. The Viability Rating (VR) was affirmed at 'bbb+'. The Outlook is Stable. A full rating breakdown is provided below.
KEY RATING DRIVERS - IDR and VR
The rating action follows the affirmation of Standard Chartered Bank's (SCB) Long-Term IDR at 'AA-' with Stable Outlook on 23 October 2013 (see related rating action commentary at www.fitchratings.com).
SCBK's IDRs and Support Rating reflect Fitch's belief that its parent SCB has an extremely high propensity to provide an extra-ordinary support for the Korean subsidiary, if needed. In this regard, Fitch equalises SCBK's IDRs with SCB's. SCBK is wholly owned by SCB and shares the same brand name. It is a core part of SCB's extensive international transaction banking operation.
SCBK's VR reflects strong ordinary support from its parent, strong capitalisation, and overall sound asset quality. It also takes into account its heavy reliance on wholesale funding and moderate profitability. SCBK's performance and franchise development in Seoul has been lacklustre since the acquisition by SCB in 2005, as highlighted by the goodwill impairment charge (USD1bn in H113) by its parent.
SCBK receives extensive ordinary support from the group, not only in corporate/management control, risk management, and foreign-currency funding, but also in terms of capital to support growth, if needed. SCBK stands out among Korea's banks for having limited exposures to distressed industrial sectors, such as shipbuilding, shipping and property development, which have been responsible for the industry's elevated credit costs. Moreover, 50%-60% of SCBK's foreign currency funding comes from the group.
Fitch does not expect a further significant improvement in SCBK's underlying profitability, considering its focus on mortgage operations and high general-and-administrative costs. Its return on assets outperformed the industry in H113 thanks to its limited exposure to the aforementioned weak sectors, gains from selling significant mortgage assets, and lower interest expense following reduction in relatively expensive wholesale time deposits.
Loan quality would continue to outperform the industry average, given its focus on mortgages. Having said that, Fitch expects its overall loan quality to deteriorate gradually in the long term, given Korean households' weakening debt servicing ability. SCBK's non-performing household loans ratio (1.2% at end-H113) was higher than the industry average (0.7%). This is mainly because of SCBK's aggressive unsecured lending to individual customers (15% of total loans), particularly in the subprime segment, which is uncommon among Korea's banks.
SCBK more heavily depends on wholesale funding in local currency than its local peers. This is mitigated by the funding/liquidity support from its parent in foreign currency. Fitch expects SCBK's loan/customer deposit ratio (LDR; 136% at end-H113) to continue to be higher than the local peer average (122%). LDR has been volatile because SCBK has sold a sizable portion of mortgage assets to Korea Housing Finance Corporation (AA-/Stable).
Fitch anticipates SCBK's capitalisation to remain solid considering its limited asset growth potential and the local regulator's guideline for all of South Korea's banks to conserve capital by limiting dividend payouts.
RATING SENSITIVITIES - IDR and VR
SCBK's IDRs will be directly affected if SCB's or the relationship with SCB were to change.
The VR could be downgraded if the current repositioning of the business does not lead to improvements in its profitability, liquidity/funding or domestic franchise in the short- to mid-term. Upside potential for the VR is very low given SCBK's overall weak credit profile compared with similarly rated local peers.
SCBK's legacy hybrid Tier 1 securities are rated four notches below its Long-Term IDR. These securities are generally notched two levels from the institutional support-driven IDR to reflect deep subordination or loss severity. Fitch believes that their non-performance risk would be neutralised by support from the parent. However, the securities rating is capped at the 'BBB+' rating of similar securities issued by SCBK's parent. Its hybrid rating will be directly affected if its parent's hybrid rating were to change.
The rating actions are as follows:
Long-Term IDR affirmed at 'AA-'; Outlook Stable
Short-Term IDR affirmed at 'F1+'
Viability Rating affirmed at 'bbb+'
Support Rating affirmed at '1'
Hybrid securities affirmed at 'BBB+'