Fitch Rates Electric Contractors' Financial Cooperative at IFS 'A-'
KEY RATING DRIVERS
The rating reflects ECFC's niche position in providing performance guarantees and loans to electrical contractors, sound capital position and manageable risk profile. The rating also incorporates a one-notch uplift for potential state support in light of ECFC's important strategic role, its establishment under specific legislation in Korea, the Electric Contractors' Financial Cooperative Act, and its supervision by the Ministry of Trade, Industry & Energy.
ECFC is exposed to concentration risk as it provides guarantees and loans to a single cyclical industry in a single country. It has well-defined exposure limits for providing various guarantee and loan products to its members. Guarantee premiums, interest on loans and investment income are key earnings contributors. Claims have been small. Profitability has been steady with pre-tax ROA at 1.4% in 2014 and 2015.
ECFC's capital level is sound and commensurate with its business profile. Its ratio of guarantee risk exposure to total shareholders' funds has been moderate at about 5x for the past five years, while shareholders' equity has consistently covered about 95% of its assets.
ECFC aims to preserve capital and secure liquidity in its investments. Loans to members represent about 60% of ECFC's invested assets with durations of less than one year. It allocates other assets based on defined yield targets and risk tolerances and has mostly focused on bank deposits and fixed-income instruments. Equity exposures are minimal, accounting for about 2% of total invested assets at end-2015.
ECFC plays a key role in contributing to the healthy development of Korea's electrical contractor industry, in promoting independent economic activity and improving the economic status of electrical contractors. Its members include 95% of the industry's registered electrical contractors.
Key triggers for an upgrade are improvements in its business profiles, including successful and profitable business diversification in terms of business class and geographical spread, supported by a consistently solid capital adequacy and prudent risk appetite.
A downgrade could arise from a significant deterioration in its credit profile, including a significant increase in guarantee exposures and large credit impairments in its guarantee and/or loan portfolios.