Woori Bank - 2010

MARC has affirmed its rating on Woori Bank’s RM1.0 billion Medium Term Notes Programme (MTN) at AAA, premised on the bank’s strong and established business franchise in the Republic of Korea (Korea), adequate capitalisation and access to government liquidity support via its government-owned holding company Korea Deposit Insurance Corporation (KDIC). While the rating also takes into consideration the potential dilution of the government shareholding in view of the ongoing privatisation of Woori Bank’s parent company, Woori Finance Holdings Co. Ltd. (WFH), MARC opines that the prospect of regulatory support for Woori Bank is deemed to be high considering its systemic importance to the Korean financial system. In addition, MARC notes that the bank’s standalone credit profile remains fairly strong despite being affected by the weak asset quality since the advent of the economic downturn. The outlook on the rating remains stable.

With total assets of KRW226.8 trillion (RM667.1 billion), Woori Bank accounted for 19.6% of Korea’s commercial banking sector assets as at end-FY2009, and is the country’s second largest commercial bank. Woori Bank is the key banking entity of its parent company WFH, in which the government of Korea, through KDIC, held a controlling stake of 57% as at end-June 2010. The bank’s operations are supported by an extensive network of 889 branches across South Korea and 51 offices in 15 different countries. The group has also been expanding its geographic reach to be globally competitive and take advantage of funding and lending opportunities abroad.

Woori Bank’s earnings rebounded strongly in FY2009 with pre-tax profits increasing twofold to KRW1.2 trillion after suffering a significant contraction of 73% in FY2008. The rebound in profits was supported by higher gains on disposal of securities, lower derivative trading losses and lower impairment charges on securities amidst improving financial market conditions. Correspondingly, the bank’s return on assets (ROA) improved to 0.42% in FY2009 from 0.11% a year earlier. That said, the bank’s profits remained pressured by lower net interest margins and weaker asset quality, and its ROA remains well below pre-financial crisis levels of close to 1.0%. The decline of the base interest rate in Korea from 5.25% to 2.00% at the beginning of FY2009, coupled with longer duration of its liabilities, were the main reasons for lower net interest margins in FY2009.

The bank’s gross non-performing loan (NPL) ratio deteriorated to 1.6% at end-FY2009 from 1.2% at end-FY2008, before weakening further to 3.0% at end-1HFY2010. Woori Bank’s loan quality appears to have been more severely impacted by the economic downturn than other domestic banks, as indicated by the banking sector’s NPL ratio of 1.9% at end-1H2010 and 1.2% at end-2009. This is attributed to the bank’s larger exposure to the corporate and small and medium enterprise (SME) segments which are more sensitive to economic performance and Woori Bank’s more prudent stance in recognising impaired loans. Loan loss reserve coverage declined correspondingly to 80% at end-1HFY2010, the first time it has dipped below 100% since 2005.

That said, Woori Bank’s capital position improved significantly with total capital ratio improving to 14.6% as at end-1HFY2010 (FY2008: 11.7%), thanks to the injection of KRW650 billion equity by WFH in FY2008 and FY2009, issue of hybrid tier-1 capital and lower risks weighted assets during the period. The bank’s reliance on wholesale funding declined with the loan-to-deposit ratio declining to 94.7% at end-1HFY2010 from 107.2% at end-FY2008, as deposit growth outstripped loan growth. That said, the dependence on wholesale funding is still considered high and is a continuing area of vulnerability for the bank. However, MARC draws comfort from the bank’s track record in raising funds from both local and foreign banking and capital markets.

Woori Bank’s near-term performance is likely to be constrained by loan loss provisioning required for new loan delinquencies on the back of the lag effect of the economic downturn. However, the stable outlook on the rating reflects MARC’s expectation that Woori Bank will continue to demonstrate a resilient long-term credit profile underpinned by its established business franchise, adequate capitalisation and proactive oversight by the regulators. In addition, support from the authorities, in the event of need, is deemed to be high.

Strengths

Challenges/Risks