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Assigns A+ Preliminary Ratings to Industrial Bank of Korea's Yen Bonds | Jul 05, 2010 |
Issuer: Industrial Bank of Korea (IBK)
Issues Preliminary Rating
Japanese Yen Bonds - Seventh Series (2010) A+
Japanese Yen Bonds - Eighth Series (2010) A+
Note:
FC (Foreign Currency Long-Term Senior Debts): A+ (Stable)
LC (Local Currency Long-Term Senior Debts): AA- (Stable)
<Rationale>
JCR has assigned A+ preliminary ratings to the above-mentioned bonds to be issued by the Industrial Bank of Korea (IBK).
IBK is a governmental financial institution established in 1961 by the Government of Korea (GOK) under the Industrial Bank of Korea Act (IBK Act) for the purpose of developing and supporting small and medium enterprises (SMEs). While it is listed on the Korea Stock Exchange, 76.2% of its shares were held by GOK (including its indirect ownership) as of the end of March 2010.
The ratings on IBK reflect the creditworthiness of GOK given its strong relationship with GOK. IBK enjoys GOK's solid legal protection under the IBK Act, which contains a provision obliging GOK to cover net losses of IBK should it incur a capital shortage. Furthermore, between December 2008 and February 2010, GOK made additional capital injections into IBK totaling KRW1.33 trillion in order to fully utilize IBK in supporting SMEs under the harsh financial and economic situation. Although GOK has revealed its intention to privatize IBK in the long term, JCR holds that, given the underlying financial and economic uncertainties that may persist for a while, the privatization process is unlikely to make concrete progress in the near future.
IBK's profitability and financial soundness remain comparable with those of other private commercial banks in Korea despite its engagement in policy-based SME financing. Underpinning such financial position are its legal and regulatory merits in fund raising, its credit risk management framework based on the expertise built up through nearly 50 years of experience and appropriate use of credit enhancement such as collateral and guarantee. From the latter half of 2008 through 2009, Korea underwent a harsh financial and economic condition. As a policy-based financial institution, IBK expanded its loans to SMEs during this period. Nonetheless, it has managed to retain its financial resilience. Its nonperforming loan (NPL) ratio, which had stayed below 1% in the first half of 2008, rose above the 1% mark at the end of September 2008. However, thanks to the country's improved economic situation as well as IBK's NPL disposal through write-off and sell-off, the ratio remained below 2% through the end of March 2010. Its net interest margin (NIM) averaged 2.78% during the first three months of 2010, staying in line with the 2-3% level logged in recent years (2.44% in 2009). Bolstered by a series of government capital injections, IBK's BIS capital adequacy ratio (CAR) rose to 12.23% (8.74% for Tier 1 ratio) at the end of March 2010, providing it with a sufficient buffer. This resilient profitability and sound financial position also support JCR's ratings on IBK.
(1) Strong Relationship with GOK
IBK was established by GOK in 1961 under the IBK Act for the purpose of developing and supporting SMEs. The act defines IBK's strong relationship with GOK including legal protection such as: (1) IBK's annual net loss for each fiscal year shall be debited by the reserve funds and, if the reserve funds are not sufficient, GOK shall assume the remaining loss (Article 43); (2) President of IBK shall, upon the request of the commissioner of the Financial Supervisory Commission (FSC), be appointed and dismissed by the President of the Republic of Korea while Managing Director, Directors, and Auditor shall be appointed and dismissed by FSC (Article 26); (3) IBK shall prepare an annual business plan comprising an operational plan and a funding plan and submit it to FSC for approval one month prior to the beginning of each fiscal year (Article 35); (4) IBK may borrow directly from GOK to make loans available to SMEs (Article 34); and (5) IBK may issue Small and Medium Business Finance Bonds whose outstanding balance shall not exceed 20 times of IBK's paid-in capital and reserves (Article 36). Since the IPO in 1994, a part of IBK's equity stake has been held by private investors. Also, an amendment to the IBK Act in 1997 repealed the provision requiring GOK to hold more than 50% of IBK's shares. Nevertheless, GOK has consistently held more than a half of IBK's shares, and even made large capital injections in 1998-99 and 2008-10. As of the end of March 2010, GOK's direct equity stake in IBK stood at 65.0%. GOK's stake effectively comes to 76.2% when the Korea Finance Corporation's 8.9% stake and the Export-Import Bank of Korea's 2.3% stake are counted.
GOK has revealed its intention to privatize IBK in the future. In September 2007, the then Ministry of Finance and Economy announced the "Restructuring Plans for Industrial Bank of Korea," which underlined that (a) privatization of IBK is inevitable in the long term while the role of policy-based SME financing undertaken by IBK should be maintained for the time being; (b) a master plan for IBK privatization will be formulated by 2008 with due consideration to IBK's transition to a commercial bank specializing in SME financing and transfer of IBK's role of policy-based SMEs financing to another government organization; and (c) IBK's privatization will be pushed forward when the market circumstances mature and allow, while the speed of privatization will be adjusted as needed through a closer monitoring of the developments in SME financing. Nevertheless, the deteriorating financial and economic situation since 2008 has once again highlighted IBK's role of policy-based SME financing. GOK, in order to support SMEs through IBK, made additional capital injections totaling KRW1.33 trillion into IBK between December 2008 and February 2010. Under such circumstances, there has been delay in GOK's study into IBK's privatization (including the formulation of the master plan by 2008). JCR believes that, given the underlying financial and economic uncertainties that may persist for a while, GOK may not work out a detailed roadmap for IBK's privatization and carry it out in the near future. Should the financial and economic situation recover and the privatization be taken up for consideration in the future, JCR would comprehensively evaluate the following factors from various perspectives and reflect them in its ratings: (i) a concrete privatization plan and the prospect of government shareholding ratio, (ii) IBK's post-privatization business model and the form and degree of GOK's involvement in its operations, (iii) treatment of GOK's loss compensation clause in the IBK Act, (iv) treatment of the existing debt (e.g., transitional measures), and (v) other factors that may strongly affect IBK's relationship with GOK.
(2) Operational and Financial Performances
IBK has established a dominant position in the SME financing market in Korea, based on its expertise built up through its experiences for nearly 50 years as a sole SME policy financing bank. Its market share stood at 19.5% at the end of 2009. Faced with a stiffening competition from other commercial banks in the SME loan market, IBK is resolved to hold or even enhance its position by making the most of its expertise and by holding fast to its customer-oriented stance especially when the financial and economic condition is difficult. It will also seek to increase its profitability by stepping up transactions with those SMEs which have high creditworthiness, high technology and great growth potential. IBK's total assets have been on the increase in recent years, reaching KRW155 trillion (JPY12.2 trillion) on a consolidated basis at the end of 2009, up 7.0% year-on-year, and KRW151 trillion (JPY11.9 trillion) on an unconsolidated basis. The provisions of the IBK Act oblige it to lend more than 70% of its loans to SMEs. As of the end of March 2010, the ratio stood at 80.1%, with loans to individuals accounting for 18.3% and those to large corporations and others for 1.6% (on an unconsolidated basis). By industry, loans to the manufacturing industry accounted for 63.4% of the total loans to SMEs. But a sector-by-sector breakdown indicates that its loan portfolio is well diversified, the largest exposure being to the "fabricated metals" sector with an 8.7% share.
IBK's profitability and financial soundness remain on a par with those of other private commercial banks in Korea despite its engagement in policy-based SME financing. Its financial position has been supported by its legal and regulatory merits in fund raising, its credit risk management framework based on the expertise built up through nearly 50 years of experience and appropriate use of credit enhancement such as collateral and guarantee. From the latter half of 2008 through 2009, Korea was hit by financial and economic hardships, which forced IBK, a policy-based financial institution, to expand its loans to SMEs. Nonetheless, the bank has managed to retain its financial resilience. Its ratio of NPL to total loans (on an unconsolidated basis; N.B. the figures to follow are all on an unconsolidated basis), which had stayed within the 0.58-0.91% range in the year to the end of June 2008, rose above the 1% mark at the end of September 2008. Nevertheless, thanks primarily to the country's improved economic situation as well as IBK's NPL disposal through write-offs and sell-offs, the ratio stayed between 1.20% and 1.52% from the end of June 2009 through the end of March 2010. The ratio of NPLs covered by loan-loss reserves stood at 131% at the end of March 2010. IBK managed to keep its net interest margin (NIM) at 2.44% in 2009 and 2.78% in the first three months of 2010, little changed from 2.53% in 2007 and 2.52% in 2008. Its net income, which once exceeded KRW1 trillion in 2006 and 2007, shrank to KRW15.4 billion in the fourth quarter of 2008 and to KRW47.9 billion in the first quarter of 2009 due mainly to increased loan-loss provisions. In the last three quarters of 2009, however, it improved to reach more than KRW200 billion, rising further to KRW376.5 billion in the first quarter of 2010. GOK injected a total of KRW 1.33 trillion into IBK between December 2008 and February 2010. As a result, IBK's capital adequacy ratio on a BIS basis rose from 10.15% at the end of September 2008 to 11.39% at the end of 2008, 11.91% at the end of 2009, and 12.23% (8.74% in Tier 1 terms) at the end of March 2010, providing it with a sufficient buffer.
Issues Preliminary Rating
Japanese Yen Bonds - Seventh Series (2010) A+
Japanese Yen Bonds - Eighth Series (2010) A+
Note:
FC (Foreign Currency Long-Term Senior Debts): A+ (Stable)
LC (Local Currency Long-Term Senior Debts): AA- (Stable)
<Rationale>
JCR has assigned A+ preliminary ratings to the above-mentioned bonds to be issued by the Industrial Bank of Korea (IBK).
IBK is a governmental financial institution established in 1961 by the Government of Korea (GOK) under the Industrial Bank of Korea Act (IBK Act) for the purpose of developing and supporting small and medium enterprises (SMEs). While it is listed on the Korea Stock Exchange, 76.2% of its shares were held by GOK (including its indirect ownership) as of the end of March 2010.
The ratings on IBK reflect the creditworthiness of GOK given its strong relationship with GOK. IBK enjoys GOK's solid legal protection under the IBK Act, which contains a provision obliging GOK to cover net losses of IBK should it incur a capital shortage. Furthermore, between December 2008 and February 2010, GOK made additional capital injections into IBK totaling KRW1.33 trillion in order to fully utilize IBK in supporting SMEs under the harsh financial and economic situation. Although GOK has revealed its intention to privatize IBK in the long term, JCR holds that, given the underlying financial and economic uncertainties that may persist for a while, the privatization process is unlikely to make concrete progress in the near future.
IBK's profitability and financial soundness remain comparable with those of other private commercial banks in Korea despite its engagement in policy-based SME financing. Underpinning such financial position are its legal and regulatory merits in fund raising, its credit risk management framework based on the expertise built up through nearly 50 years of experience and appropriate use of credit enhancement such as collateral and guarantee. From the latter half of 2008 through 2009, Korea underwent a harsh financial and economic condition. As a policy-based financial institution, IBK expanded its loans to SMEs during this period. Nonetheless, it has managed to retain its financial resilience. Its nonperforming loan (NPL) ratio, which had stayed below 1% in the first half of 2008, rose above the 1% mark at the end of September 2008. However, thanks to the country's improved economic situation as well as IBK's NPL disposal through write-off and sell-off, the ratio remained below 2% through the end of March 2010. Its net interest margin (NIM) averaged 2.78% during the first three months of 2010, staying in line with the 2-3% level logged in recent years (2.44% in 2009). Bolstered by a series of government capital injections, IBK's BIS capital adequacy ratio (CAR) rose to 12.23% (8.74% for Tier 1 ratio) at the end of March 2010, providing it with a sufficient buffer. This resilient profitability and sound financial position also support JCR's ratings on IBK.
(1) Strong Relationship with GOK
IBK was established by GOK in 1961 under the IBK Act for the purpose of developing and supporting SMEs. The act defines IBK's strong relationship with GOK including legal protection such as: (1) IBK's annual net loss for each fiscal year shall be debited by the reserve funds and, if the reserve funds are not sufficient, GOK shall assume the remaining loss (Article 43); (2) President of IBK shall, upon the request of the commissioner of the Financial Supervisory Commission (FSC), be appointed and dismissed by the President of the Republic of Korea while Managing Director, Directors, and Auditor shall be appointed and dismissed by FSC (Article 26); (3) IBK shall prepare an annual business plan comprising an operational plan and a funding plan and submit it to FSC for approval one month prior to the beginning of each fiscal year (Article 35); (4) IBK may borrow directly from GOK to make loans available to SMEs (Article 34); and (5) IBK may issue Small and Medium Business Finance Bonds whose outstanding balance shall not exceed 20 times of IBK's paid-in capital and reserves (Article 36). Since the IPO in 1994, a part of IBK's equity stake has been held by private investors. Also, an amendment to the IBK Act in 1997 repealed the provision requiring GOK to hold more than 50% of IBK's shares. Nevertheless, GOK has consistently held more than a half of IBK's shares, and even made large capital injections in 1998-99 and 2008-10. As of the end of March 2010, GOK's direct equity stake in IBK stood at 65.0%. GOK's stake effectively comes to 76.2% when the Korea Finance Corporation's 8.9% stake and the Export-Import Bank of Korea's 2.3% stake are counted.
GOK has revealed its intention to privatize IBK in the future. In September 2007, the then Ministry of Finance and Economy announced the "Restructuring Plans for Industrial Bank of Korea," which underlined that (a) privatization of IBK is inevitable in the long term while the role of policy-based SME financing undertaken by IBK should be maintained for the time being; (b) a master plan for IBK privatization will be formulated by 2008 with due consideration to IBK's transition to a commercial bank specializing in SME financing and transfer of IBK's role of policy-based SMEs financing to another government organization; and (c) IBK's privatization will be pushed forward when the market circumstances mature and allow, while the speed of privatization will be adjusted as needed through a closer monitoring of the developments in SME financing. Nevertheless, the deteriorating financial and economic situation since 2008 has once again highlighted IBK's role of policy-based SME financing. GOK, in order to support SMEs through IBK, made additional capital injections totaling KRW1.33 trillion into IBK between December 2008 and February 2010. Under such circumstances, there has been delay in GOK's study into IBK's privatization (including the formulation of the master plan by 2008). JCR believes that, given the underlying financial and economic uncertainties that may persist for a while, GOK may not work out a detailed roadmap for IBK's privatization and carry it out in the near future. Should the financial and economic situation recover and the privatization be taken up for consideration in the future, JCR would comprehensively evaluate the following factors from various perspectives and reflect them in its ratings: (i) a concrete privatization plan and the prospect of government shareholding ratio, (ii) IBK's post-privatization business model and the form and degree of GOK's involvement in its operations, (iii) treatment of GOK's loss compensation clause in the IBK Act, (iv) treatment of the existing debt (e.g., transitional measures), and (v) other factors that may strongly affect IBK's relationship with GOK.
(2) Operational and Financial Performances
IBK has established a dominant position in the SME financing market in Korea, based on its expertise built up through its experiences for nearly 50 years as a sole SME policy financing bank. Its market share stood at 19.5% at the end of 2009. Faced with a stiffening competition from other commercial banks in the SME loan market, IBK is resolved to hold or even enhance its position by making the most of its expertise and by holding fast to its customer-oriented stance especially when the financial and economic condition is difficult. It will also seek to increase its profitability by stepping up transactions with those SMEs which have high creditworthiness, high technology and great growth potential. IBK's total assets have been on the increase in recent years, reaching KRW155 trillion (JPY12.2 trillion) on a consolidated basis at the end of 2009, up 7.0% year-on-year, and KRW151 trillion (JPY11.9 trillion) on an unconsolidated basis. The provisions of the IBK Act oblige it to lend more than 70% of its loans to SMEs. As of the end of March 2010, the ratio stood at 80.1%, with loans to individuals accounting for 18.3% and those to large corporations and others for 1.6% (on an unconsolidated basis). By industry, loans to the manufacturing industry accounted for 63.4% of the total loans to SMEs. But a sector-by-sector breakdown indicates that its loan portfolio is well diversified, the largest exposure being to the "fabricated metals" sector with an 8.7% share.
IBK's profitability and financial soundness remain on a par with those of other private commercial banks in Korea despite its engagement in policy-based SME financing. Its financial position has been supported by its legal and regulatory merits in fund raising, its credit risk management framework based on the expertise built up through nearly 50 years of experience and appropriate use of credit enhancement such as collateral and guarantee. From the latter half of 2008 through 2009, Korea was hit by financial and economic hardships, which forced IBK, a policy-based financial institution, to expand its loans to SMEs. Nonetheless, the bank has managed to retain its financial resilience. Its ratio of NPL to total loans (on an unconsolidated basis; N.B. the figures to follow are all on an unconsolidated basis), which had stayed within the 0.58-0.91% range in the year to the end of June 2008, rose above the 1% mark at the end of September 2008. Nevertheless, thanks primarily to the country's improved economic situation as well as IBK's NPL disposal through write-offs and sell-offs, the ratio stayed between 1.20% and 1.52% from the end of June 2009 through the end of March 2010. The ratio of NPLs covered by loan-loss reserves stood at 131% at the end of March 2010. IBK managed to keep its net interest margin (NIM) at 2.44% in 2009 and 2.78% in the first three months of 2010, little changed from 2.53% in 2007 and 2.52% in 2008. Its net income, which once exceeded KRW1 trillion in 2006 and 2007, shrank to KRW15.4 billion in the fourth quarter of 2008 and to KRW47.9 billion in the first quarter of 2009 due mainly to increased loan-loss provisions. In the last three quarters of 2009, however, it improved to reach more than KRW200 billion, rising further to KRW376.5 billion in the first quarter of 2010. GOK injected a total of KRW 1.33 trillion into IBK between December 2008 and February 2010. As a result, IBK's capital adequacy ratio on a BIS basis rose from 10.15% at the end of September 2008 to 11.39% at the end of 2008, 11.91% at the end of 2009, and 12.23% (8.74% in Tier 1 terms) at the end of March 2010, providing it with a sufficient buffer.
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