Woori Bank - 2009

MARC has affirmed its rating on Woori Bank’s (Woori Bank) RM1.0 billion Medium Term Notes Programme (MTN) at AAA. The rating is premised on the bank’s strong position in its local South Korean market supported by an extensive customer reach, adequate capitalisation with good quality tier-1 capital, and access to government liquidity support via its holding company, government-owned Korea Deposit Insurance Corporation (KDIC). Although MARC notes that the bank’s performance had been constrained by the challenging macroeconomic conditions which had impacted both asset quality and profitability, the agency takes comfort from the bank’s adequate capitalisation as well as the institutional experience of the bank and its regulators in handling previous crises. This underpins the stable outlook on the rating.

With total assets of KRW232.5 trillion (USD199.0 billion), Woori accounted for 19.1% of Korea’s commercial banking sector assets as at end-2008, and is the country’s second largest bank. Woori Bank is the major banking entity of its parent, Woori Financial Group (WFG) in which the government, through the KDIC, holds a controlling stake of 73%. Woori Bank’s operations are supported by an extensive network of 896 branches across Korea and 43 branches in 12 different countries. It has also been expanding geographically to increase global competitiveness and open up funding and lending opportunities abroad, exhibited by a considerable growth in foreign lending and multiple foreign currency debt issuances in recent years.

Woori Bank is fairly well capitalised with a total capital adequacy ratio (CAR) and tier-1 ratio of 11.7% and 7.7% as at end-2008, above the regulatory requirement of 8% and 4% respectively. MARC also notes that as of 1Q2009, 88.0% of the bank’s tier-1 capital consists of equity capital and internally generated retained earnings, although the strengthened capital position was also supported by an increase in tier-1 hybrid capital.

Amid the economic downturn, the bank’s asset quality has also deteriorated with its gross NPL ratio weakening to 1.25% in 2008 from 0.65% in 2007, before further weakening to 1.83% as of 1H2009. That  said, MARC notes that Woori  Bank’s gross NPL ratio level as of  end-1H2009 is still better than the
Korean banking sector’s gross NPL ratio of 2.19%. The rise in NPLs is visible among large corporate as well as SME borrowers, with manufacturing, construction & real estate, and trade being among the most affected sectors. Although lower than at end-2008, the bank’s loan loss reserve coverage of NPLs as of end-1H2009 was still healthy at 103% (2008: 148 %).

Net interest income grew by 12.5% in 2008, although the growth was still below the 18.8% growth in loan assets. This is attributable to both lower lending rates and higher cost of funding. This resulted in the steady compression of the bank’s net interest margin to 1.78% in 1H2009 from 2.70% in 2007. The bank’s secondary activities produced mixed results in 2008 with forex gains increasing fivefold and investment and dealing income declining by 80.7% on the back of sizeable losses incurred in derivatives and securities trading. The bank’s profit was also weighed down by high loan loss provisions, equivalent to 0.90% of average gross loans in 2008 (2007: 0.44%) on the back of rising NPLs. Consequently, the bank’s ROA declined to a low of only 0.11% in 2008 from 0.92% in 2007, well below the Korean banking sector average of 0.31% in 2008.

Although the bank’s deposit base grew by 18.2% in 2008, its loan-to-deposit ratio remained high at 119.7% during the year as loan growth surpassed that of deposits. While MARC takes note of the bank’s track record in raising funds from both local and foreign sources, in addition to funding from government sources during the global financial crisis, MARC nevertheless views the very high dependence on wholesale funding to be a continuing area of vulnerability for a commercial bank such as Woori.

MARC opines that improvements in Woori’s near-term performance is likely to remain constrained by asset quality and profitability pressures amid the still weak, albeit improving, economic conditions. The stable outlook on the rating reflects the MARC’s expectation that Woori will continue to demonstrate a resilient long-term credit profile given its strong business franchise, adequate capitalisation, improved risk management and proactive oversight by Korean regulators.

Strengths

Challenges/Risks