Fitch Affirms Korea's Construction Guarantee IFS 'A'; Outlook Stable
KEY RATING DRIVERS
CG's rating incorporates Fitch's view that CG continues to enjoy strong state support as well as the company's financially sound fundamentals, including its well-established market franchise and sound capital commensurate with its business profile. The rating also reflects CG's high business concentration risk in the domestic construction sector, which is closely correlated with the economy.
The agency believes CG's strong state support, as evident from the company's key role in the construction industry and heavy state involvement in its operations, is unlikely to change in the short to medium term. CG is a cooperative established in 1963 to promote construction industry growth and development by offering financing and guarantee insurance services to members. The company is governed and regulated by the Ministry of Land, Infrastructure and Transport and must obtain relevant approval per the Framework Act on the Construction Industry for operational activities.
Return on average equity (ROAE) fell to 2% in 2015, from 3% in 2014, due to higher claim payments arising from the bankruptcy of several construction companies, and was 2% on an annualised basis for 1H16. The net guarantee loss rate - total net guarantee claims paid after recovery/total amount of guarantee underwritten - increased to 0.24% in 2015, from 0.13% in 2014, but remained low.
CG underwrites more than 95% of its business from the South Korean market. Net premiums written/total equity was below 0.5x at end-2015 and 1H16, indicating sound capital buffers for the company's business profile. CG operates under a regulatory capital regime modelled after the Basel II capital framework. Its regulatory capital ratio was above 300% for the past three years (end-June 2016: 310%, 1H15: 310%), well in excess of the 100% regulatory minimum, providing a deep cushion for its potentially volatile business portfolio.
Key triggers for an upgrade include sustained improvements in its financial fundamentals, with successful and profitable business diversification in terms of business class and geographical spread, supported by a consistently solid regulatory capital ratio of above 300%.
Key triggers for a downgrade include a significant deterioration in CG's credit profile; for example, guarantee premiums written/equity consistently above 2x and regulatory capital ratio falling consistently below 200%.