(The following statement was released by the rating agency)
Sept 26 - Fitch Ratings has affirmed Korea-based Busan Bank's (BSB) Long-Term Issuer Default Rating (IDR) at 'BBB+'. The Outlook is Stable. Fitch has also affirmed BSB's Viability Rating (VR) at 'bbb+'. A full rating breakdown is provided below.
BSB's IDR, which is driven by its VR, mainly reflects its strong profitability, as well as adequate capitalisation and loan quality. BSB has demonstrated resilience during the economic downturn due to a favourable operating environment in Busan and its surrounding industrial zone in which BSB's lending activity is concentrated. The Stable Outlook reflects Fitch's expectation that BSB can absorb a reasonable level of credit costs and financial stress.
The VR also reflects its adequate risk management for its daily banking operation. This factor is a constraint on both the VR and IDR given the bank's aggressive growth plan and, in line with its domestic peers, its weak liquidity/funding profile by international standards. Fitch notes that parent BS Financial Holding's (BSFH) plan to grow its total assets to KRW70trn by 2015 from KRW40trn at end-H112 implies that there is a risk that BSB will continue to grow its loans about 12% per annum amid the global economic slowdown. BSB's loan growth from end-2008 to end-H112 was 38% compared with the industry average of 9%. Fitch believes that risk management would benefit from further investment in order to support its strong growth ambition.
BSB's '2' Support Rating and 'BBB' Support Rating Floor reflect Fitch's continued belief that the South Korean government ('AA-'/Stable) has a high propensity to support the bank, if required. This view is based on the bank's systemic importance as a domestic bank but also as the largest regional bank in South Korea. It holds 33% and 27% of deposits and loans, respectively, in Busan. The Busan area is a host to the country's auto and shipbuilding/shipping industries and an international sea port. It accounts for 15.8% of Korea's population.
A substantial improvement in both loan portfolio diversification and risk management could trigger positive rating action on the VR. The VR may be downgraded if strong asset growth results in a significant erosion of its capitalisation. However, such likelihood is low given the reasonable buffer provided by its internal capital generation backed by its strong operating return on assets (1.4% in H112).
Its high margins, stemming from SME loans, have been declining since Q409 due to low interest rates and intensified competition in the region, especially with Kyongnam Bank (KNB). Furthermore, large commercial banks have been expanding in Busan and in its surrounding areas. Fitch believes that BSB and KNB are expanding their assets to position themselves for their potential merger; the former has expressed its interest in acquiring KNB if and when the government decides to sell KNB.
BSB's precautionary-and-below loan (PBL) ratio trend has been rising in a sign of weakening loan quality. The bank's PBL ratio of 3.7% at end-H112 was worse than expected, particularly given its much faster loan growth relative to the sector. BSB has concentration in SME loans, which account for about 60% of its total loans compared with the industry average of 35%. However, this risk is partly mitigated by its diversification into industries with SMEs.
BSB's Fitch Core Capital ratio was adequate at 10.4% at end-H112 and Tier I 10.6% under Basel II standardised approach for credit risk. Its loans/customer deposits ratio was high by international comparison at 117% at end-H112.
The 'BBB' rating for BSB's lower tier 2 subordinated securities is one notch below the bank's VR reflecting their high loss severity and non-performance risk.
The rating actions are as follows:
Long-Term IDR affirmed at 'BBB+'; Outlook Stable
Short-Term IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB'
Senior unsecured debt affirmed at 'BBB+'
Subordinated securities affirmed at 'BBB'