Fitch Affirms Busan Bank at 'BBB '; Outlook Negative
KEY RATING DRIVERS
IDRS AND VR
The bank's IDRs are driven by its VR, which reflect its strong regional franchise in Busan, solid profitability, sound loan quality, and stable management. The ratings also take into account the bank's lower capitalisation compared with its local peers, rising risk appetite, and (like other Korean banks) high reliance on wholesale funding by international standards.
The Negative Outlook reflects continuous pressure on capitalisation amid an increasingly challenging operating environment.
In Fitch's view, it is uncertain whether BSB's core equity Tier 1 (CET1) ratio can be improved to or sustained above 10% considering its high loan growth and dividend pay-out pressure from its parent, BNK Financial Group (BNK). As expected by Fitch, BSB's CET1 ratio declined to 9.8% at end-1H15 from 10.4% at end-1H14 after it upstreamed capital to BNK to support the acquisition of Kyungnam Bank (KNB) in 2H14.
BSB is under increasing pressure to make dividend payments to BNK, which needs the funds to cover its operating and financing cash flow and manage down its high common equity double leverage ratio (130% at end-1H15). This is because BNK's capitalisation has weakened with CET1 ratio of 7.2% at end-1H15 (1H14: 9.4%). Furthermore, Fitch views the financial positions of KNB and BNK's other subsidiaries as inferior to BSB, thus rendering them less able to provide BNK with sufficient funds. Capital is also tight at the small non-bank subsidiaries due to their rapid growth.
BSB's loan book grew by a rapid 16% for the 18 months to the end of 1H15. Most of the growth came from real estate-related sectors, while the bank has also undertaken some larger single-name exposure. Concentration risk could increase noticeably if BSB were to underwrite more large exposures. BSB could face significant deterioration in loan quality if interest rates increase and/or operating conditions deteriorate, including due to slowing external demand, which would affect manufacturing industries and exporters in the region. The impact of deterioration would be greater if BSB is more willing to take on large exposures or increase loan concentrations.
Stable profitability has been supported by higher net interest margin, stemming from its strong franchise in the region and substantial SME exposure. BSB will not benefit fully from potential synergies with KNB because the two banks are likely to operate independently in the near to medium term. This also means the acquisition of KNB is also not likely to change BSB's franchise.
BSB is a regional bank operating in Busan and its vicinity. BNK owns 100% of KNB after acquiring an additional 43% of KNB, another regional bank in the neighbouring province, via a share swap in July 2015.
The 'BBB+' ratings on the senior unsecured notes of BSB are driven by their IDRs, 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' SR and 'BBB' SRF reflect Fitch's belief that the South Korean 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, as a regional bank, is not likely to be designated as a domestically significant bank.
IDRS, VR, SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's IDRs and VR are sensitive to a change in Fitch's assessment of BSB's capitalisation and overall financial profile or event risks such as consolidation with KNB or aggressive M&A by BNK. The bank's IDRs and VR could be downgraded if BSB's capitalisation does not recover to above 10% within a year (this could arise due to excessive credit growth or BNK's high leverage increasing pressure on BSB to pay further dividends) or the risk appetite of BSB and BNK increasing amid the challenging operating environment. The Outlook could be revised to Stable if BSB's capitalisation recovers significantly and pressure to support BNK has subsided (for example, the parent issuing additional common equity) along with disciplined loan book growth while other key credit metrics remain substantially unchanged. The VR is not likely to be upgraded in the near to medium term.
Any change in the Long-Term IDR would affect the ratings on the senior notes.
The SR is potentially sensitive to any change in the ability or propensity of the Korean authorities to provide timely support to the bank. Global regulatory initiatives aimed at reducing implicit government support available to banks may cause downward pressure on ratings.
The rating actions are as follows:
Long-Term IDR affirmed at 'BBB+'; Negative Outlook
Short-Term 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+'.