THE EXPORT-IMPORT BANK OF KOREA (KEXIM) - 2018

MARC has assigned an intrinsic credit strength rating (ICSR) of BBB+_ND to The Export-Import Bank of Korea (KEXIM). The ICSR is based on a non-domestic scale. Concurrently, the rating agency has affirmed KEXIM’s financial institution (FI) rating at AAA and its Medium-Term Notes (MTN) programme of RM1.0 billion and conventional and/or Islamic MTN programmes with a combined nominal value of RM3.0 billion at AAA and AAA/AAA_IS respectively. The FI and issue ratings are based on the domestic rating scale. The outlook on the ratings is stable. The aforementioned RM3.0 billion MTN programme matures on March 12, 2018.

The ICSR is based on KEXIM’s standalone credit profile and does not incorporate any external support from the government of the Republic of Korea (South Korea). The key rating drivers for the ICSR are KEXIM’s strong franchise strength, sound liquidity position, adequate asset quality and moderate earnings performance. (Refer to MARC’s methodology on ICSR: Financial Institutions Rating Criteria.

KEXIM’s strong franchise strength is underscored by its crucial role in facilitating the development of South Korea’s export-oriented economy by providing financial support to South Korean companies for export and import transactions, overseas investment projects and developing overseas natural resources. As at 1H2017, the bank’s total outstanding loans stood at KRW74.1 trillion, of which export credit constituted 52.1%, followed by overseas investment credit at 29.2% and import credit at 5.2%. During the period, due to weaker credit demand from the shipbuilding and overseas construction sectors, KEXIM’s loan growth slowed to 3.3% y-o-y (2016: 8.1%) while acceptances and guarantees contracted by 9.3% y-o-y to KRW50.6 trillion. In light of continuing soft demand for the shipbuilding sector, the bank has reduced its planned credit disbursement to KRW60.0 trillion for 2018 from KRW67.0 trillion for 2017.

KEXIM registered lower impairments in the shipbuilding sector which contributed to an improved gross non-performing loans (NPL) ratio of 4.06% for 1H2017 (2016: 4.53%). Loan loss reserve coverage, however, declined to 72.5% (2016: 83.3%) following recoveries on non-performing assets. As a result of sizeable impairment write-backs of KRW655.5 billion, KEXIM registered a profit before tax of KRW582.2 billion for 1H2017. On excluding the impairment write-backs, the bank would post a loss of KRW73.3 billion, although the loss has narrowed sharply from KRW937.9 billion in 1H2016 due partly to improved net interest margin.

KEXIM’s common equity Tier 1 and total capital ratios rose to 11.0% and 12.4% respectively (2016: 9.2%; 10.8%) following the government’s non-cash capital injection of KRW1.4 trillion. The injection was in the form of shares in government-held corporates Yeosu Gwangyang Port Authority (KRW125 billion), Incheon Port Authority (KRW125 billion) and Korea Aerospace Industries Ltd (KRW1,167 billion). In respect of funding and liquidity, KEXIM mainly relies on international debt capital markets and foreign bank borrowings, benefiting from its quasi-sovereign status which provides good accessibility to funding and significantly reducing refinancing risk.

The FI rating on KEXIM is equalised to MARC’s foreign currency sovereign rating of AAA/stable on South Korea. The rating equalisation reflects MARC’s view of a very high likelihood of state support from the South Korean government based on KEXIM’s status as a government-owned and -controlled policy bank and the government’s legal obligation under the KEXIM Act to uphold the bank’s solvency. MARC also draws comfort from the track record of frequent capital injections by the government to the bank in the past.

The stable ratings outlook primarily reflects MARC’s expectations of the South Korean government’s strong capacity and willingness to continue supporting the bank.

Major Rating Factors

Strengths

• Wholly-owned state policy bank;
• Strong commitment from Korean government to provide capital support; and
• Key role in financing South Korea’s export sector.

Risks/Challenges

• High sectoral concentration in terms of credit exposures; and
• Low profitability as a consequence of its public policy role.