OREANDA-NEWS. Fitch Ratings has affirmed South Korea-based Hana Bank's (Hana) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'A-' with Stable Outlook. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS - IDRs, SR, and SRF

Hana's IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's belief of an extremely high probability of extraordinary support from the South Korean government (AA-/Stable), if needed. This view is based on Hana's systemic importance as one of the major commercial banks in South Korea. The Stable Outlook reflects the sovereign's Outlook.

KEY RATING DRIVERS - Viability Rating

Hana's 'bbb+' Viability Rating (VR) reflects the bank's franchise and management, which are not as strong as that of its immediate peers. The VR also takes into account its relatively sound loan quality and stronger net profitability than its local peers and adequate capitalisation, despite a somewhat challenging operating environment.

Hana's franchise is smaller than other large and higher rated banks in Korea, although it has a solid franchise as one of the major commercial banks. The management of Hana and its parent Hana Financial Group (HFG) are more aggressive in risk-taking, which is reflected in the faster loan book growth and some operational lapses in the past.

Hana's loan quality is generally sound, helped by a loan portfolio that is focused on households and self-employed borrowers. That said, while Fitch does not believe the country's high household debt is an imminent risk given the low unemployment and interest rates, in the longer term, household debt servicing ability is likely to come under pressure, particularly if interests begin to rise.

While Korean banking sector profitability is low, Hana's profitability is slightly stronger than its peers with return on assets of 0.5% in 2014 thanks to tighter expense control and its lower credit costs. Nevertheless, Hana's net interest margin has been below industry average because it focuses on high net worth individuals who are sensitive to changes in deposit and loan rates. Faced with low interest rates and a competitive banking industry, it is a challenge for Hana and its peers to meaningfully improve their profitability.

Hana's funding and liquidity profile reflects its somewhat smaller franchise relative to higher-rated domestic peers; the bank has a higher loan-to-customer deposit ratio at around 122% at end-3Q14. The liquidity coverage ratio under Basel III standards was at a comfortable 105%, compared with the minimum of 80% in 2015, which will be increased to 100% in 2018. Like its local peers, Hana depends highly on foreign-currency wholesale funding; however, it has ensured that foreign-currency lending is funded by long-term debt, in accordance with regulatory guidance.

Hana's capitalisation is adequate and is expected to remain stable (Fitch core capital ratio: 12.4% at end-3Q14) thereby complying with regulatory guidelines under Basel III and its potential designation as a domestically systemically important bank (D-SIB).

Hana and its sister bank, Korea Exchange Bank (KEB; A-/Stable), are wholly owned by HFG. Hana was to be integrated with KEB in 1H15, but the process has been stopped by a court ruling in favour of KEB's union members.

RATING SENSITIVITIES - IDRs, SR, and SRF

The bank's IDRs, SR and SRF will be affected by changes in the ability and propensity of the Korean government to provide support. The consolidation between Hana and KEB may trigger a rating review, although its current ratings are already at the highest level for Korea's commercial banks.

RATING SENSITIVITIES - VR

Hana's VR could be upgraded if there is sustainable improvement in its margin, funding and liquidity along with a noticeable improvement in risk control, although Fitch believes this to be a remote prospect in the near-term. We expect the consolidation process with KEB to present challenges but in the longer-term it has the potential to strengthen Hana's competitive position as well as funding. Any material development in the consolidation process might trigger a rating review. The VR could be pressured if there was a noticeable increase in risk appetite contributing to weaker assessment of capitalisation, funding and asset quality.

KEY RATING DRIVERS AND RATING SENSITIVITIES- Senior Unsecured Debt

The rating on Hana's senior unsecured debt is aligned with the bank's Long-Term IDR. Any change in the IDR will be reflected in the rating of the debt.

The full list of rating actions is as follows:

Hana Bank
Long-Term IDR affirmed at 'A-'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'bbb+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'

Senior unsecured debt and global medium-term note programme affirmed at 'A-'