Fitch Affirms Busan Bank at 'BBB+'; Outlook Revised to Stable
The Outlook has been revised to Stable because pressure on the bank's capitalisation has eased after a capital injection by its parent, BNK Financial Group (BNK). Fitch expects BSB to maintain its Fitch Core Capital ratio above 10%, unless ongoing restructuring in some troubled corporate sectors puts significant stress on the economy of the bank's main operating region.
KEY RATING DRIVERS
IDRS AND VR
The bank's IDRs are driven by the VR, which takes into account rising pressure on asset quality, weaker capitalisation relative to its peers, and its relatively high reliance on wholesale funding (like other Korean banks) by international standards. The rating also considers BSB's solid profitability, which is backed by a high net interest margin (NIM), its significant franchise in Busan and stable management.
Fitch does not expect a rapid downsizing of major shipbuilders to result in systemic stress and significantly erode the bank's capital buffer, in our base scenario. However, BSB's asset quality may suffer, although the deterioration is likely to remain manageable. This view is based on fairly diversified economy of the bank's main operating region and the measures introduced by Korean authorities to support borrowers. BSB's direct exposure to shipbuilding is not significant - the industry formed 2.7% of total loans as of end-2015.
BSB's precautionary-and-below loan (PBL) ratio (2.3% at end-1H16) has slightly lagged the commercial bank average (about 2.1%) since end-1H15. Fitch believes BSB's PBL ratio could further deteriorate in the near term, as the bank decelerates its loan growth and its portfolio seasons with rising pressure from some weak corporate sectors. BSB plans to slow loan book growth to about 5.3% in 2016, from the 9.3% average pace in the previous four years, and focus on retail portfolios.
Fitch sees rising credit costs and the need to pay dividends to support BNK as factors preventing the bank from significantly building up its capital position in the near term. BSB's Fitch Core Capital ratio improved to 11.2% at end-1H16 after a KRW180bn capital injection by BNK in February 2016. BNK's double leverage was still high at 130% at end-1H16. This was even after it raised KRW470bn via an equity issue in January 2016 and put most of the funds into recapitalising its subsidiary banks - BSB and Kyongnam Bank (KNB).
Fitch believes that BSB's high NIM would continue to support profitability even if asset quality worsens. Regulatory NIM of 2.3% in 1Q16 was significantly better than that of the commercial banks (1.6% on average), supported by BSB's substantial SME portfolio (making up 63% of total loans at end-2015). BSB has maintained a higher profitability than the Korean peer average for about a decade, but the gap with the commercial banks has been narrowing down - mainly due to BSB's higher credit costs.
BSB's loans/customer deposits ratio (adjusted for interbank loans and deposits) was high at 124% at end-2015, but not much worse than that of other commercial banks (about 120% on average). Its Basel III liquidity coverage ratio was strong at 142% at end-1Q16, benefiting in part from its relatively small guarantees and commitments compared with Korea's bigger banks.
BSB has a very strong local franchise in Busan (where the bank takes about 30% of total loans and deposits) while its nationwide presence is relatively small (with less than 3% market share). BSB and KNB are the key bank subsidiaries of BNK. Fitch expects no major synergies between BSB and KNB despite their adjacent geographical operations, as the two banks operate independently.
The 'BBB+' ratings on the senior unsecured notes of BSB are driven by the bank's Long-Term IDR, as they are direct, unsubordinated and unsecured obligations of the bank, and rank equally with all their other unsecured and unsubordinated obligations.
SUPPORT RATING AND SUPPORT RATING FLOOR
BSB's '2' Support Rating (SR) and 'BBB' Support Rating Floor (SRF) reflect Fitch's belief that the South Korea government (AA-/Stable) has a high propensity to support the bank, if required. The view is based on the bank's domestic importance, given BSB's focus on export-oriented SMEs in Busan. BSB was not designated a domestic systemically important bank by the Korean regulatory authorities.
IDRS, VR AND SENIOR DEBT
The bank's IDRs and VR ratings are sensitive to a change in Fitch's assessment of BSB's asset quality and capitalisation, or event risks such as consolidation with KNB or aggressive M&A by BNK. The ratings could be downgraded if BSB's capital buffer is eroded noticeably by its weaker internal capital generation, or if BSB and BNK were to increase their risk appetite significantly (through high asset growth and leverage). Conversely, Fitch would upgrade BSB's ratings if BSB further builds up its capital buffer noticeably with a disciplined risk appetite in the medium term.
A change to the Long-Term IDR would affect the ratings on the senior notes.
SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's SR and SRF are sensitive to any change in our assumptions about the propensity and ability of the South Korea government to provide timely support to the bank. This might arise if there is a change in the Korean authorities' ability to provide support.
Global regulatory initiatives aimed at reducing the implicit government support available to banks may cause downward pressure on the ratings. The local regulator is planning to propose a revision to its resolution framework to add a bail-in feature toward the end-2016. 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 rating actions are as follows:
Long-Term Foreign-Currency IDR affirmed at 'BBB+'; Outlook revised to Stable from Negative
Short-Term Foreign-Currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB'
Senior unsecured debt rating affirmed at 'BBB+'