Mar 24, 2014

MARC has affirmed its ratings of AAA/AAAID on The Export-Import Bank of Korea’s (KEXIM) Conventional and/or Islamic Medium Term Notes (MTN) programme with a combined nominal value of RM3.0 billion and AAA on KEXIM’s RM1.0 billion MTN programme. The outlook for all the ratings is stable. The affirmed ratings incorporate support uplift from the government of the Republic of Korea (South Korea) from the bank’s standalone credit strength which MARC continues to consider as very strong. The uplift is on the basis of (1) KEXIM’s policy role as South Korea’s official export credit agency to support the country’s export sector; (2) full government ownership; and (3) the government’s obligation to maintain the solvency of the bank and cover annual net losses beyond the bank’s reserves. The sovereign has continued to demonstrate its commitment to inject capital into KEXIM in a timely manner to support the bank’s lending activities. 

MARC uses its foreign currency country ceiling of AAA for South Korea as the main factor underpinning the support uplift. The rating reflects the country’s prudent financial management and policy framework, robust fiscal position and sound capacity to service foreign debt. 

Established in 1976, KEXIM is effectively wholly-owned by the South Korean government and is mandated to support the growth of the country’s economy by financing South Korean exports and overseas investments. KEXIM’s main activities are providing export and import credits as well as overseas investment credits and guarantee facilities. Demand for financing continues to be strong as is evident from the 15.8% increase in KEXIM’s gross loans, comprising export, import and overseas investment credits, to KRW55.3 trillion as of September 30, 2013 from KRW47.8 trillion at year-end 2012. Export credits remain the bank’s main focus, accounting for 53% of its total outstanding loans as at end-September 2013. Overseas investment credits which are extended to South Korean companies investing abroad, particularly in the manufacturing and development of natural resources sectors, represent the second largest composition of the bank’s portfolio at 33%. The share of import credits as a percentage of the bank’s loan book remains modest at 4%. Apart from lending activities, the bank is also notably involved in the issuance of acceptances and guarantees, which stood at KRW56.0 trillion as of June 30, 2013 with a credit exposure of KRW42.5 trillion. 

MARC observes KEXIM’s low profitability continues to reflect its status as a state-owned bank with a public policy mandate. While the bank does not seek to maximise profits, it strives to maintain sufficient earnings to support internal capital generation. For the nine-month financial period ended September 30, 2013 (9M2013), KEXIM registered a lower net income of KRW37 billion (9M2012: KRW228 billion), due mainly to a sharp increase in provisions on possible credit losses in the shipping and shipbuilding industry. 

Given KEXIM role in supporting South Korea’s capital good exports and the government’s continued emphasis on supporting the struggling shipping industry, KEXIM’s loans have been largely concentrated in the manufacturing and transportation sectors. MARC notes that loans to both sectors collectively accounted for 67% of the bank’s loan portfolio as of end-June 2013. KEXIM’s single borrower credit exposure risk is fairly large; total credit exposure to its top five borrowers, including loans and guarantees extended to affiliates, amounted to KRW20.9 trillion as at end-June 2013, or 2.3x its shareholders’ equity. 

Notwithstanding the fairly concentrated credit portfolio, KEXIM’s gross non-performing loan (NPL) ratio had exhibited a downward trend since 2010, standing at 0.97% at year-end 2012. However, the ratio rose to 1.13% as at end-June 2013, mainly due to non-performance of loans extended to shipping and shipbuilding companies. The bank’s NPLs are well provisioned for as reflected by a loan loss reserve coverage of 377% (end-2012: 451%). Additionally, the proportion of KEXIM’s acceptances and guarantees classified as substandard and below (or non-performing) remains low at 0.3%. MARC views KEXIM’s ability to maintain sound asset quality metrics to be dependent on the resilience of the South Korean export sector’s performance, which has shown stronger growth in 4Q2013. 

The bank’s capitalisation remains adequate, with Tier 1 and total capital ratios at 8.7% and 10.2% respectively as of end-June 2013. The South Korean government continues to demonstrate its commitment to the bank by providing timely capital injections. Following the contribution of KRW20 billion in January 2013, the government injected another KRW80 billion in July, resulting in an increase in the bank’s paid-in capital to KRW7,238 billion as at September 30, 2013. MARC views the demonstrated willingness of the South Korean government to ensure the bank remains soundly capitalised relative to its risk profile as an essential factor to the bank’s continued good access to international debt capital markets and foreign banks for funding. 

The stable outlook on KEXIM’s ratings reflects MARC’s expectations that there will be no material deterioration in the bank’s own operating and credit profile, or no change in the capacity and willingness of the South Korean government to support the bank in the near to medium term.

Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my; 
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.  

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