Woori Bank - 2014

MARC has affirmed its AAA rating on Woori Bank’s RM1.0 billion Medium-Term Notes (MTN) programme. The outlook on the rating is maintained at stable. The affirmed rating reflects Woori Bank’s strong banking operations in the Republic of Korea (South Korea), its stable funding and liquidity profiles as well as its sound capitalisation. The rating also considers Woori Bank’s continued high systemic importance as the second largest commercial bank in South Korea. MARC has rated South Korea at AAA/Stable on the Malaysian national scale and has a country ceiling of ‘AAA’ for ringgit-denominated bonds and notes issued by entities domiciled and operating in South Korea.

Woori Bank has total assets of KRW246.3 trillion, or 13% of the banking system’s total assets, as at September 30, 2014. The bank has an entrenched presence in the retail and corporate banking segments in South Korea, underpinned by an extensive network of 992 branches nationwide. The rating agency notes that the recent merger between parent company Woori Finance Holdings Co (WFH) and Woori Bank has had no material impact on the bank, given the modest asset size and operations of the former at the time of the merger. Woori Bank has benefitted from the South Korean government’s 51% interest in the bank, which is held through the Korean Deposit Insurance Corporation (KDIC). While the South Korean government remains committed to privatising Woori Bank despite recent unsuccessful attempts, MARC opines that regardless of any change in the bank’s ownership structure, the likelihood of external support from the South Korean government would remain high. 

MARC observes that Woori Bank’s net interest margin (NIM) has continued to be pressured by prevailing intense competition in the South Korean banking sector. For the nine-month financial period ended September 30,2014 (9M2014), NIM declined to 1.58% (9M2013: 1.87%) on the back of lower net interest income of KRW2,772 billion (9M2013: KRW3,070 billion). However, the bank posted higher net profit of KRW746 billion (9M2013: KRW417 billion), largely attributed to a sharp decline in loan loss provisioning to KRW474 billion (9M2013: KRW1,468 billion). Correspondingly, return on assets and equity rose to 0.32% and 4.6% respectively in 9M2014 (2013: 0.22%; 2.9%).

Woori Bank’s non-performing loans (NPL) declined to KRW4.4 trillion as at end-September 2014 on a non-consolidated basis, mainly on the back of a decline in gross NPL among large corporates and SMEs (end-2013: KRW5.4 trillion). The lower gross NPL translated into an improved gross NPL ratio of 2.36% (end-2013: 2.99%), although the ratio remains elevated as compared to the South Korean banking industry average of 1.72% as at end-September 2014. Woori Bank’s higher NPL level relative to the banking industry is mitigated by its strong capitalisation ratios. The bank’s Tier-1 and total capital ratio stood at 12.8% and 16.2% respectively as at end-September 2014 (end-2013: 12.7%; 15.5%) as compared to the banking industry average of 11.7% and 14.2%. Woori Bank’s capital position is well placed to meet the additional capital buffer requirement of up to 2.5% that is expected to be implemented beginning 2016. In addition, the bank’s newly established Basel III-compliant subordinated debt instruments of US$1 billion are expected to support the bank’s capital base as the non-Basel III qualifying debt instruments are gradually phased out.

Woori’s high proportion of core and time deposits of 38.6% and 55.9% of the bank’s total deposits as at end-September 2014 (FY2013: 37.0%; 55.5%) reflects a low-cost and a relatively stable funding profile. However, as the bank’s loan-to-deposit ratio remains high, increasing to 98.5% from 97.2% during the period, its ability to extend loans will be constrained without a corresponding increase in its deposit base given the maximum loan-to-deposit ratio of 100% imposed by the regulator. MARC views positively the bank’s higher foreign currency liquidity ratio of 138.6% (FY2013: 124.2%), taking into account the reliance of the bank’s foreign funding on wholesale funding sources.

The stable outlook on the ratings reflects MARC’s expectation that Woori Bank will maintain a sound credit profile commensurate with its current rating band in the next 12 to 18 months. Additional comfort is provided through the proactive oversight by the regulators.

Strengths

• Strong consumer and corporate banking franchises in domestic market;
• High systemic importance as South Korea’s second largest commercial bank; and
• Sound capitalisation. 

Challenges/Risks

• Compression of net interest margin;
• Slow economic growth may weigh on asset quality; and
• Intense competition in South Korean banking sector.