Woori Bank - 2008

MARC has assigned a AAA rating to Woori Bank’s (Woori) RM1.0 billion Medium Term Notes Programme (MTN). The rating carries a stable outlook. The rating reflects Woori’s above average competitive position, underpinned by its strong retail and corporate franchises in Korea and extensive network of branches, its solid asset quality and consistent financial performance, good capital base and sound funding profile. The positive rating factors are moderated by its challenging domestic operating environment, in particular, the increased competition in corporate and consumer lending and retail deposit-taking and the potential for asset quality and profitability to be affected by slower than anticipated growth in the Korean economy. The stable outlook reflects MARC’s belief that Woori will maintain its asset quality and earnings in the near to medium term.

Majority owned by the government, Woori is the third largest commercial bank in Korea with total assets of KRW218.5 trillion as at the end of 2007. Woori is wholly owned by Woori Financial Group which is in turn 73% owned by the Korean Government through Korea Deposit Insurance Corporation.  The bank was formed in 1998 as a result of the merger between Commercial Bank of Korea and Hanil Bank which was undertaken pursuant to banking sector restructuring efforts following the Asian Financial crisis. About half of Woori’s network of over 850 domestic branches is based in metropolitan Seoul. Woori has plans to expand beyond its primarily domestic base; it has opened its overseas branches and representative offices in strategic locations across Asia, and intends to extend its customer reach in overseas markets beyond Korean corporations and expatriates to local high net worth individuals. The bank is also moving from traditional banking into the higher value-added areas of investment banking, private equity and derivatives, amongst others.

Woori is fairly well capitalised with a Capital Adequacy Ratio (CAR) of 11.71% as at the end of FY2007, which is supported by sustained growth in its earnings and high earnings retention. Its Tier-1 capital is of high quality with only a small proportion of hybrid instruments. Internally, the bank is also required to meet a more stringent CAR requirement of 11% compared to the minimum 8% prescribed by the regulator.

The bank continues to maintain profitability measures comparable to its strongest commercial banking peers. Woori experienced a slight narrowing of its net interest margin to 2.45% during 2007, which was partially offset by the increasing contribution from non-interest income, derived primarily from fees and commissions, gains on derivatives trading and foreign exchange trading income.

Against a backdrop of relatively benign credit conditions, Woori, similar to its domestic peers, continues to report low NPL levels. Woori’s NPL ratio which trended down from 2.27% in 2004 to 0.63% in 2007 also reflects the effect of rapid loan growth in recent periods in addition to declining charge-offs. Woori’s loan base is dominated by loans to households and to SMEs which accounted for 46% and 44% of total loans respectively as at end 2007. About half of the bank’s lending to households relates to home equity mortgages. Woori’s exposure to credit cards remains modest at 2.1% of its total household loans. Woori’s SME loans are most exposed to manufacturing (29%), construction (13%) and the retail/wholesale sector (14%). Woori’s loan loss coverage ratio is very good at 177% as at end-September 2007, and reflects a continued conservative approach to loan loss reserving as well as the tightened new loan loss provisioning guidelines of the Financial Supervisory Commission (FSC).

As at 1H2007, saving deposits accounted for 72.6% share of Woori’s total deposits (FY2006: 76.3%) while low-cost demand deposits were 6.5% of total deposits (FY2006: 7.3%). Woori’s high loan-to-deposit ratio (119%) indicates an increasing reliance on capital market funding to fund further loan growth.

MARC believes that sound regulation and monitoring as well as stringent guidelines by the FSC have been instrumental in limiting the bank’s appetite for risk. In recent years, ongoing improvements in the bank’s risk management and control framework have been evident, much of which were undertaken in preparation for the implementation of Basel II on January 1, 2008.

Strengths

• Favourable asset quality as reflected in low levels of non-performing loans and delinquencies;
• Very strong domestic competitive position, underpinned by its strong retail and corporate franchises; and
• High level of implied regulatory and government support given the importance of the bank to the Korean financial system.

Challenges/Risks

• Challenging domestic banking environment in South Korea as mirrored in declining margins and relatively low returns on average assets;
• Asset quality could come under pressure in the event of further deterioration in macroeconomic and global financial market conditions; and
• Reducing the bank’s revenue dependence on domestic operations.