THE EXPORT-IMPORT BANK OF KOREA (KEXIM) - 2019

MARC has affirmed its financial institution (FI) rating of AAA on The Export-Import Bank of Korea (KEXIM) and the issue rating of AAA on its Medium-Term Notes programme of RM1.0 billion. The FI and issue ratings are based on the domestic rating scale. The outlook on the ratings is stable.

The FI rating on KEXIM is equalised to the Republic of Korea’s (South Korea) AAA/stable rating from MARC. The rating equalisation reflects MARC’s view of a very high likelihood of 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 ensure the bank’s solvency. Concurrently, MARC has also affirmed the intrinsic credit strength rating (ICSR) of BBB+ND on KEXIM based on the non-domestic rating scale. The ICSR assesses KEXIM’s credit profile without incorporating any external support from the South Korean government. KEXIM’s ICSR rating mainly reflects its strong franchise strength as well as its sound funding and liquidity profile. These strengths are moderated by some concerns on asset quality which is deemed adequate and by an erratic earnings performance which has shown an improvement in recent periods.

As at 1H2018, KEXIM’s total outstanding loans stood at KRW73.1 trillion with export credit accounting for the majority at 53.6%, followed by overseas investment credit at 31.0% and import credit at 5.1%. During the period, KEXIM’s loan book contracted marginally by 1.4% y-o-y, reflecting the slower credit demand from the shipbuilding and industrial plant sectors, and for overseas construction activities. Shipbuilding remains a key sector financed by KEXIM with three of five of its largest borrowers coming from this sector. While South Korean shipbuilding companies have established a strong presence in the region, their prospects have diminished in recent years given their close links to oil and gas price movements; any downtrend in oil prices would impact the credit quality of the borrowers.

KEXIM’s top five largest borrowers accounted for 13.7% of its total credit exposures, thereby posing some concentration risk. The bank has continued with efforts to diversify its portfolio by increasing loans to new growth industries as well as small and medium-sized enterprises, which grew to 18.0% and 41.2% of total loans as at end-June 2018 (2017: 13.9%, 40.8%). However, overall loan growth for 2019 is expected to remain subdued, partly due to the soft demand from the shipbuilding sector.

Gross non-performing loans (NPL) and the gross NPL ratio stood lower at KRW3.4 trillion and 3.19% as at end-June 2018 (2017: KRW3.9 trillion, 3.64%). The improvement was largely attributed to higher impairment write-offs, mainly from the shipbuilding sector. The impairment write-backs of KRW121.2 billion helped boost pre-tax profit to KRW722.9 billion. On excluding these impairment write-backs, pre-tax profit would be KRW601.7 billion, an increase of 3.3% from 1H2017.

KEXIM’s CET1 and total capital ratios increased to 12.0% and 13.6% as at end-June 2018. MARC draws comfort from the South Korean government’s past record of extending capital support to the bank and is of the view that government support will remain forthcoming when required. KEXIM’s funding and liquidity profile remains healthy due to its access to international debt capital markets. Currently, there is no outstanding amount under the rated programme.

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.