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* Banks seen likely to refinance obsolete Basel II securities mostly onshore
By Daniel Stanton
SINGAPORE, May 15 (IFR) - Woori Bank last week printed South Korea's first offshore Additional Tier 1 notes of the year, but prospects for further bank capital deals from the country seem dim.
Despite good demand for the trade, Woori remains the only Korean bank to have issued AT1 securities offshore, having printed three such deals. But its peers look unlikely to become more active in the dollar market in the near future.
On Monday, Woori priced $500 million perpetual non-call five securities at par to yield 5.25 percent, versus initial guidance in the 5.5 percent area, drawing orders of $1.5 billion.
That was the lowest coupon for an AT1 dollar issue year to date, but the favourable regulatory regime, which makes Korean bank capital so attractive for foreign investors, may also curb new deal volumes.
"We don’t expect much AT1s this year in Korea given that the Common Equity Tier 1 and Tier 1 ratios of the Korean banks have improved by about 90 basis points on average at end-2016 because of the change to the regulatory capital treatment on loan-loss reserves booked under retained earnings,” said Heakyu Chang, senior director for financial institutions at Fitch Ratings.
Last week, Moody’s published its outlook for the Korean banking sector and estimated that onshore issuance would continue to dominate, with much of the bank capital issues coming from replacing legacy instruments.
"The surveyed Korean banks in aggregate plan to raise about $22 billion in foreign currency debt in 2017, slightly higher than the $21 billion they raised in 2016. This includes senior unsecured and capital securities," said Sophia Lee, senior credit officer with Moody's financial institutions group.
"Banks haven’t issued AT1s that frequently, and Tier 2 issuance has been limited to replacing legacy Tier 2s that were phasing out under Basel III. We estimate 5.9 trillion won ($5.2 billion) in debt capital securities, issued under Basel II and no longer counted towards capital under Basel III, will be phased out or called in 2017, which will reduce the banks’ capital ratio by 47 basis points on a system-wide basis. Most future issuance will be onshore, reflecting the current trend."
Woori Bank’s CET1 ratio stood at 10.7 percent at the end of 2016 and its T1 ratio at 12.8 percent, up from 8.5 percent and 10.4 percent, respectively, a year earlier. Woori's non-performing loan ratio also improved to 0.98 percent from 1.47 percent over the same period.
Its new notes are expected to be rated Ba3/BB+ (Moody's/S&P), while Woori is a senior A2/A credit.
The notes will be written down if the bank is deemed to be non-viable, but, under Korean rules, there is no hard trigger if the capital ratio drops below a certain level. In Korea, the government can inject funds into a struggling bank without triggering a writedown of the notes.
Like Woori's previous offshore AT1 issue last September, distributions will be restricted if the bank's capital drops below regulatory minimum, following a change to Korean regulations last year. The major Korean banks need to maintain a CET1 ratio of 8 percent, T1 ratio of 9.5 percent and total capital adequacy ratio of 11.5 percent by 2019. The average CAR of majors Shinhan, Kookmin Bank, Nonghyup, Hana and Woori stood at 15.6 percent in December.
"In practice, we believe that, in the event of capital breaching minimum levels, distributions would be suspended on all the AT1s," wrote CreditSights.
In 2018, Korea will introduce IFRS9, which will raise provisioning costs. A Moody’s survey found that most Korean banks expected drops of up to 50bp in their core capital ratios when the rules come into effect, although some of that will be offset with unrealised gains on equity investments, which will count towards capital.
Since last September's AT1 issue, the state-owned Korea Deposit Insurance Corp has reduced its stake in the bank, cutting its holding to 21.4 percent with the sale of a 29.7 percent stake to a consortium of Korean financial investors. However, that divestment did not impact Woori’s credit rating and also did not affect investor demand.
Even launching the deal a day before the Korean presidential election did not discourage investors. "It's a pretty stable democracy and I don't think it added to the risk profile of this particular issuer, given how well capitalised they are," said a source close to the deal.
BNP Paribas, Citigroup, HSBC (B&D), JP Morgan and Nomura were active bookrunners for Woori Bank’s AT1 issue. MUFG and Societe Generale were passive bookrunners and Woori Global Markets Asia was co-manager.
Issuance prospects for offshore bank capital may be limited for this year, but regulatory changes are likely to spur more senior bond issues in future.
Korea’s Financial Services Commission has asked banks to work on recovery and resolution plans before the end of the year, which could be the precursor to introducing a bail-in regime for senior notes of domestic systemically important banks under rules on total loss-absorbing capacity.
There will be no clarity on that prospect until at least 2018, but should Korea adopt bail-in rules for TLAC, that could spur new issuance of senior non-preferred notes. (Reporting by Daniel Stanton; editing by Vincent Baby and Dharsan Singh)