Fitch Affirms Standard Chartered Bank Korea at 'AA-'; Outlook Negative
KEY RATING DRIVERS
IDRS AND SUPPORT RATING
The bank's IDRs and Support Rating reflect Fitch's continued belief of an extremely high probability that its parent Standard Chartered Bank (SCB; AA-/Negative) will provide extraordinary support for the Korean subsidiary, if needed. As a result, Fitch equalises SCBK's IDRs with SCB's. SCBK is wholly owned by SCB and shares the same brand name. It is a core part of SCB's extensive international transaction banking operation.
The Negative Outlook reflects the Negative Outlook on its parent SCB (see "Fitch Affirms Standard Chartered at 'AA-', Maintains Negative Outlook" dated 30 June 2015 at www.fitchratings.com).
SCBK's 'bbb' Viability Rating (VR) mainly reflects its weak profitability and company profile relative to domestic peers, and adequate balance-sheet strength. It also takes into account the challenging operating environment in Korea and its rather strong risk appetite.
SCBK's balance sheet has shrunk and its market shares in key segments have declined to 2%-3% by about 1pp-2pp since 2010 as SCBK tried to reposition its business amid slowing economic growth and intense competition in South Korea. The bank has also not been able to reduce its staff size in line with its smaller scale, leaving it with high personnel and general and administrative (G&A) expenses.
As a result, SCBK's net profits are more dependent on the volatile income from the sizeable derivative operation. Fitch expects the bank to reduce its dependence on this segment only gradually because of the challenging local operating environment, including the low interest rate cycle.
Fitch does not expect any significant change in SCBK's risk appetite. SCBK's overall asset quality is sound. It has stopped extending unsecured loans to subprime individuals and has been shedding higher-risk loans since mid-2013. Its customer loan book shrank by 28% from 2011 to mid-2015, compared with the local commercial banks' average of 18% growth.
Fitch estimates the upper bound of SCBK's return on assets (ROA) for the next few years to be 0.4%, leaving limited buffer against unexpected shocks. SCBK reported net losses in 2014 (-0.1% ROA).
The smaller balance sheet has resulted in a stronger capitalisation and liquidity/funding profile. SCBK's Fitch Core Capital ratio was 13.9% at mid-2015, compared with the Korean commercial bank average of 12.7%. SCBK's average risk weight also improved to 48% at mid-2015 from 54% at end-2013 as it reduced higher-risk loans. SCBK's loans/customer deposits ratio has improved significantly to 121% at end-2014 from 154% at end-2011 because of deleveraging in lending, not because of expansion in its deposit base.
IDRS AND SUPPORT RATING
The IDRs and Support Rating are extremely sensitive to any change in assumptions around the propensity or ability of SCB to provide timely support to the Korean subsidiary. SCBK's ratings would be directly affected if SCB's ratings or its relationship with its parent were to change.
The bank's VR is sensitive to a change to Fitch's assumptions around SCBK's underlying profit structure, company profile, and operating environment.
Fitch may upgrade SCBK's VR if there is a significant structural reduction in its personnel and G&A expenses, reduced reliance on volatile derivative operations, and/or local management putting in place a sustainable strategy that better positions the bank to expand and compete more effectively against domestic banks.
Fitch does not expect to a downgrade of the VR in the near term unless its balance sheet strength deteriorates significantly, which may happen if SCBK increases its risk appetite significantly.
The rating actions are as follows:
Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Negative
Short-Term Foreign-Currency IDR affirmed at 'F1+'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '1'