S&P: Woori 'A/A-1' Ratings Affirmed; SACP Revised To 'bbb+'; Basel III T-1 Subordinated Notes Rated 'BB+'
We also assigned our 'BB+' issue rating to Woori's proposed US$500 million drawdown of Basel III Tier-1 subordinated notes from its US$7 billion global medium-term notes (GMTN) program. The issue rating on the proposed drawdown is subject to our review of the final issuance documentation.
At the same time, we raised the long-term issue rating on the junior subordinated tranche of Woori's GMTN program to 'BB+' from 'BB'. We also upgraded the subordinated tranche of the GMTN program and the US$1 billion Basel III Tier-2 subordinated notes under the program to 'BBB' from 'BBB-'. We also raised the rating on Woori's existing Basel III and Basel II Tier-1 hybrid issue to 'BB+' from 'BB'.
We affirmed the issuer credit ratings because we expect Woori to maintain its strong business position, adequate capitalization, and stable funding and liquidity profiles over the next 12-24 months. However, we note that the bank has a weak track record in managing credit risks and concentration risk in weak corporate sectors, such as shipbuilding and shipping, especially compared with major commercial peers.
"We have revised upward our assessment of Woori's stand-alone credit profile (SACP) to 'bbb+' from 'bbb' to reflect our view that the bank's capitalization has strengthened following its proposed issue of Basel III Tier-1 subordinated notes," said S&P Global Ratings credit analyst Daehyun Kim. "We expect Woori's risk-adjusted capital (RAC) ratio before diversification adjustment to remain above 7% in the coming one to two years."
Woori's RAC ratio has also benefited from lower risk weights applied in our capital analysis to unexpected losses, following our upgrade of Korea (AA/Stable/A-1+) and our review of the country's banking system in August 2016. With Woori's lower risk weights, we estimate the bank's 2015 RAC ratio to be about 7.1% compared with our previous figure of about 6.3%.
We regard Woori's proposed Basel III Tier-1 subordinated notes as having intermediate equity content because of its loss-absorbing features. Therefore, we would include the proposed issuance amount in the bank's total adjusted capital until the aggregate amount of such instruments is equivalent to 33% of the bank's adjusted common equity.
Our ratings on the proposed issue and other Tier-1 hybrids are three notches below Woori's 'bbb+' SACP. The lower notching is based on our hybrid capital criteria: one notch reflects our downward assessment for risks related to subordination, and two notches to reflect our downward assessment for risk of dividend nonpayment for a Tier-1 instrument.
Our issue ratings do not reflect the risk of write-down and waiver of principal and interest payments upon the occurrence of a nonviability event. We currently believe nonviability would likely be triggered only if the issuer falls into a negative net-worth position. We also think Korean banks--including Woori--will likely receive extraordinary support from the government in a preemptive manner and at a relatively early stage if they were to come under financial stress.
We expect the proposed issue to behave as we currently understand its terms in the context of the Korean regulatory and industry environment. We could lower the issue rating by at least one additional notch if we were to assess that extraordinary support would not be provided in a preemptive manner or such preemptive government support would constitute a nonviability event and therefore lead to a principal write-down or equity conversion of the hybrid. Additionally, we believe the risks related to non-payment of dividends via legally available reserves depending on the ability of the bank to meet certain regulatory capital ratios will be captured into our SACP assessment.
"The stable outlook on Woori reflects our view that the bank will maintain its credit profile over the next 18-24 months," said Mr. Kim.
We believe Woori will likely manage a potential rise in credit costs with current preprovisioning profit levels amid challenging operating conditions, characterized by ongoing pressure on the credit quality from weak corporate sectors such as shipping and shipbuilding. We also believe that the Korean government's privatization plan for Woori is unlikely to have any significant rating implications. Government ownership has not been a rating factor for Woori. We expect the bank to continue to have high systemic importance, given that it holds about 10% market shares in both the loan and deposit markets in Korea.
We could lower the ratings on Woori if the bank's asset quality deteriorates significantly and capitalization weakens, dragging the RAC ratio below 7%.
We could raise the ratings on Woori if the bank's asset quality improves continuously with lowered credit costs.