September 29, 2017 / 6:53 AM / in a year

Fitch Affirms Citibank Korea at 'A-'; Outlook Stable

(The following statement was released by the rating agency) SEOUL, September 29 (Fitch) Fitch Ratings has affirmed Citibank Korea Inc's (CKI) Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Fitch has also affirmed the Viability Rating (VR) at 'bbb+'. A full list of rating actions is at the end of this Rating Action Commentary. KEY RATING DRIVERS IDRS AND SUPPORT RATING The bank's IDRs and Support Rating reflect Fitch's view of an extremely high likelihood that parent Citibank, N.A. (A+/Stable/a) would provide support, if necessary. This view is based on CKI's strategic importance to its ultimate parent Citigroup Inc.'s (A/Stable/a) extensive international banking operation; integrated risk management; and a high reputational risk to Citigroup should CKI be allowed to default - given the virtually full ownership by the parent and brand-name sharing. CKI's Long-Term IDR is one notch lower than the common VR of Citigroup and Citibank, based on Fitch's view that it will be less of a priority for Citigroup to support CKI than Citigroup's material legal entities (MLEs) in the event that the parent undergoes a resolution. CKI has a fairly independent franchise in its own right in South Korea, which is not a core consumer banking market to Citigroup. CKI, like most of Citigroup's international subsidiaries, was not specifically named as an MLE in Citigroup's resolution plan, last updated in July 2017. The Stable Outlook reflects the Stable Outlook on its ultimate parent Citigroup. (see "Fitch Affirms Citigroup's Long-Term IDR at 'A'; Outlook Stable", dated 28 September 2017 at VIABILITY RATING The 'bbb+' Viability Rating reflects strong capitalisation, and steady ordinary support from Citigroup - especially in risk management, cross-border financing, derivative operations and foreign-currency funding. It also reflects a diminishing local franchise, soft underlying profitability, and relatively high risk appetite that has led to weaker asset quality than at its higher-rated local peers. Fitch expects CKI to maintain strong capitalisation in the medium term - given its limited prospects for asset growth - even though a further significant improvement is likely to be held back by modest internal capital generation. CKI, in line with Citigroup, measures risk-weighted assets with the standardised approach, which is different from most of the local peers which use the internal-rating based approach. The Fitch Core Capital ratio at 18.0% at end-1H17 was significantly higher than the 13.7% local commercial bank average. CKI's loans-to-customer deposits ratio (after adjusting for loans and deposits to/from financial institutions) had improved to 114% by end-2016 from 138% at end-2014 as the bank cut back its loans by 11ppt during the period while customer deposits stabilised under the low-interest-rate environment. Its substantial liquid fixed-income portfolio (forming about 20% of total assets) provides a significant buffer to a reasonable challenge to its liquidity and funding. CKI's Basel III liquidity coverage ratio (124% at end-1H17) has been above the local peer average since the ratio's first disclosure in 1Q15. CKI's foreign-currency funding is heavily reliant on Citibank N.A. and its affiliates. The bank's strategic focus on profitability away from asset growth had already led to a smaller domestic franchise over the last decade. The ongoing large-scale branch shutdown is likely to put additional downward pressure to its loan and deposit franchise in the near term. It remains to be seen whether its attempt to transform the retail business into wealth-management and digital banking from the traditional branch-based operation could generate a sustainable return in the long term. CKI announced in July 2017 that it would close down 90 out of its 126 total branches by October 2017. Fitch forecasts CKI's underlying operating profits/risk-weighted assets to remain relatively weak at around 0.8% in the next two years. Its high general and administrative cost base is likely to continue to drag down the ratio relative to the local peers. The bank has become more reliant on income streams from derivatives and securities trading, which can be quite volatile depending on capital market situations, as its interest-income base has diminished notably following a significant downsizing of its loans. CKI's precautionary-and-below loans ratio (PBL ratio; 3.2% at end-1H17), as per the local regulator's loan categorisation, has remained worse than the local commercial bank average (1.5%). However, the ratio has improved noticeably over the past three years as the bank rapidly reduced poor-quality credit card receivables and expanded into unsecured personal loans, especially targeting salary workers with a stable regular income. Excluding credit card revolving assets, the PBL ratio was 1.6%, which is broadly in line with the local peer average. The loans to households and self-employed individuals, in aggregate, represented 72% of total loans at end-1H17, compared with its major local peers' average of about 62%. It remains unclear as to how Korea's weakening household debt-servicing ability will affect CKI, while Fitch does not see this factor as an imminent systemic issue - given Korea's quite strong job security, backed by strong labour laws and sound buffers in the banking system (eg mid-50% average loan-to-value). RATING SENSITIVITIES IDRS AND SUPPORT RATING The IDRs and Support Rating are sensitive to any change in Citigroup's ratings or CKI's relationship with its parent. The ratings could be affected by a change in Citigroup's resolution plan, which may prompt us to reassess the parent's ability or propensity to support. However, Fitch views this as unlikely in the near-term. VIABILITY RATING The Viability Rating is sensitive to a change in Fitch's assumptions regarding company profile, underlying profit structure and operating environment. Fitch may downgrade CKI's Viability Rating if CKI's shrinking franchise and high cost base undermine its business model significantly. The rating could also be downgraded if the challenging operating environment weakens the asset quality and/or capitalisation to a great extent, which is not Fitch's base-case scenario. Fitch does not expect to upgrade the Viability Rating in the near future because of CKI's shrinking franchise and low underlying profitability. The rating upgrade is also limited by CKI's large exposure to unsecured personal loans. The rating actions are as follows: CKI Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F1' Viability Rating affirmed at 'bbb+' Support Rating affirmed at '1' Contact: Primary Analyst Matt Choi Associate Director +82 2 3278 8372 Fitch Australia Pty Ltd, Korea Branch 9F Kyobo Securities Building 97, Uisadang-daero, Yeongdeungpo-Gu Seoul 07327, South Korea Secondary Analyst Heakyu Chang Senior Director +82 2 3278 8363 Committee Chairperson Parson Singha, CFA Senior Director +662 108 0151 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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