OREANDA-NEWS. Fitch Ratings has today affirmed the Long-Term Foreign-Currency Issuer Default Rating (IDR) on South Korea-based NongHyup Bank (NHB) at 'A-'. The Outlook is Stable. At the same time, Fitch has assigned a Viability Rating (VR) to NHB at 'bbb'. A full list of rating actions is at the end of this Rating Action Commentary.

KEY RATING DRIVERS

IDRS, SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's IDRs, senior debt ratings, Support Rating and Support Rating Floor reflect Fitch's belief of an extremely high probability that the South Korean government (AA-/Stable) would support NHB, if required. This view is based on NHB's systemic importance as one of Korea's largest commercial lenders, with 10% and 13% of the industry's total assets and deposits, respectively.

Fitch no longer provides any additional rating uplift for its policy roles as these have become less significant and as a consequence we think that the authorities are less likely to differentiate between NHB and Korea's other systemically important banks in terms of access to extraordinary support in times of need. The Stable Outlook reflects the Stable Outlook on South Korea.

The Short-Term IDR is affirmed at 'F1' in line with Fitch's typical approach stated in its rating criteria when applied to support-driven ratings.

VIABILITY RATING
The 'bbb' Viability Rating reflects NHB's significant local franchise and linkage with NHB's ultimate parent National Agricultural Cooperative Federation (NACF), which are reflected in NHB's weaker risk control, management quality, and overall financial profile relative to the local industry average.

NHB's franchise strength is to some degree offset by the operational relationship with NACF, in which NHB is incentivised to maximise profits to support NACF's distributions to its member cooperatives and farmers, potentially undermining the bank's longer-term strategy, business model and risk management relative to its Korean peers.

These factors are evident in NHB's weaker asset quality, with precautionary-and-below loan ratio (3.4% at end-3Q15) being higher than the local commercial bank average (2.2%). Fitch expects NHB's loan growth to be broadly in line with the industry's as it has been in the past. Korean banks, including NHB, have been focusing on mortgages since 2010 as they turned more conservative in lending to the slowing corporate sectors.

NHB's profitability (ROA: 0.26% in 1H15) is noticeably below the commercial banks' average (ROA: 0.53%), because it pays a brand fee to NACF (14bp of average total assets in 2014) to support the latter's policy roles and its relatively weak fee and trading incomes and high credit costs. However, at the risk-adjusted net profit level before the brand fee (70bp in 2014), the bank is more comparable with the commercial bank average (98bp). Fitch believes that the brand fee can be reduced if NHB were to come under stress.

NHB's funding and liquidity are better than that of local commercial banks. NHB's strong deposit base supports a loans/customer-deposits ratio (105% at end-1H15) that has been consistently better than the commercial banks' average (about 120%). While NHB has some foreign-currency wholesale funding, its demand for foreign-currency funds is significantly smaller than the bigger commercial banks because it has more modest foreign-currency operations.

Fitch expects NHB to maintain adequate capitalisation. The Fitch Core Capital ratio, adjusted for the exposure to individual cooperatives, was about 11.1% at end-2014 (the commercial bank average: 12.7%). The FCC ratio before the adjustment at end-3Q15 was 12.8%. NHB's regulatory capital ratio benefits from being allowed to risk-weight exposures to individual cooperatives at 20% in line with local regulations, whereas commercial banks have higher risk weights.

Meanwhile, its direct parent NongHyup Financial Group Inc. (NHFG) has a high common-equity double leverage ratio (118% at end-3Q15). NHFG's FCC ratio was 11.5% at end-3Q15.

RATING SENSITIVITIES

IDRS, SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR
The IDRs, senior debt ratings, Support Rating and Support Rating Floor are sensitive to any change in assumptions around the propensity or ability of the Korean authorities to provide timely support to the bank. This might arise if there is a significant change in the sovereign rating. Furthermore, global regulatory initiatives aimed at reducing implicit government support available to banks may cause downward pressure on the ratings.

VIABILITY RATING

The bank's VR is sensitive to changes to Fitch's assumptions around NHB's relationship with its ultimate parent NACF, which impacts the assessment of management strength and risk appetite. Furthermore, Fitch may upgrade NHB's VR if there is a significant structural reduction in its burden to support NACF's distributions leading to stronger and sustainable profitability and internal capital generation. An upgrade may also come if NHB lowers its risk appetite significantly, which will be reflected in long-term loan quality and credit costs more in line (and consistently so) with higher-rated local peers. Conversely, the VR may be downgraded if NHB's risk appetite increases significantly, leading to deterioration in its asset quality and capitalisation.

The rating actions are as follows:

NongHyup Bank
Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1'
Viability Rating assigned at 'bbb'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Senior unsecured debt (including global medium-term note programme) affirmed at 'A-'