Fitch Affirms Citibank Korea at 'A-'; Outlook Stable
KEY RATING DRIVERS
IDRS AND SUPPORT RATING
The affirmation of CKI's IDRs and '1' Support Rating reflects Fitch's view that there is an extremely high probability that the bank would be supported by its parent, Citibank N. A. (A+/Stable/a), if required.
This view is based on the strategically important role CKI plays in Citigroup Inc.'s (A/Stable/a) extensive international banking operation; integrated risk management; reputational risk to Citigroup were the Korean subsidiary allowed to default; and uncertainty about CKI's long-term performance prospects amid the challenging operating environment in South Korea, which is a non-core consumer banking market to Citigroup.
CKI is an indirect subsidiary of Citibank, N. A., which is a material legal entity (MLE)of Citigroup. It operates more independently than some of Citigroup's other international subsidiaries, with a good franchise in South Korea in its own right. Its Long-Term IDR is notched down once from the common VR of Citigroup and its operating entities in the US to reflect the lower integration and independent franchise.
Like most of Citigroup's international subsidiaries, CKI is not specifically named as a MLE of the group. Thus, Fitch believes it will be less of a priority for Citigroup to support CKI in the event the parent undergoes a resolution. However, Fitch may reassess parent and subsidiary linkages when global standards for bank recovery and resolution plans, the designation of MLEs and the positioning of internal total loss-absorbing capacity (TLAC) become more permanent in the future.
The Stable Outlook reflects the Stable Outlook on its ultimate parent Citigroup (see "Correction: Fitch Affirms Citigroup's Long-Term IDR at 'A'; Outlook Stable", dated 15 June 2016 at www. fitchratings. com).
VIABILITY RATING
The 'bbb+' Viability Rating (VR) mainly reflects CKI's very strong capitalisation and strong ordinary support from Citigroup, especially in risk management and foreign-currency funding/liquidity. The VR also takes into account CKI's declining local franchise, relatively weak profitability, and loan quality that is noticeably worse than the industry average (a function of above-peer risk appetite).
Fitch expects CKI to maintain its Fitch Core Capital ratio of 16.2% at end-1H16, which is the highest among Korea's banks, given limited asset growth and internal capital generation prospects. Unlike most other local banks, CKI uses the standardised approach to measure credit risk, which is consistent with Citigroup's practice.
CKI's loans/customer deposits ratio is high (126% at mid-2016), although it has improved form the peak of 141% at end-1H15. However, its sizeable liquid securities portfolio (amounting about 20% of total assets as per the group's guideline) and liquidity support from the group provide a large cushion for any reasonable challenges to its liquidity and funding in the future. Almost all of CKI's foreign-currency funding comes from the group.
The on-going business realignment has resulted in a smaller deposit base and deleveraging of the loan book. CKI's market shares in deposits and loans have fallen to about 2% in 2015. Fitch expects CKI's franchise in Korea to gradually shrink given its focus is not much on asset growth but more on profitability.
Fitch forecasts CKI's underlying profitably to remain low at around 0.8% in terms of operating profits/risk-weight assets for the next few years. It still has a high general and administrative cost base relative to the local peers. It highly depends on income streams from relatively high-risk, high-spread credit card products and securities trading, which can be quite volatile depending on capital market situations.
CKI's precautionary-and-below loan (PBL) ratio improved significantly to 3.6% at mid-2016 from the peak 7.2% at 1Q14 following rapid reduction of poor-quality credit card receivables and expansion in relatively higher quality unsecured consumer loans. Its PBL ratio is still below that of local peers, but if credit card receivables are excluded, the PBL ratio was in line with the commercial banks average of 2.1%.
CKI's loans to households and self-employed individuals, in aggregate, represent about 70% of its total loans at end-1H16. While it remains unclear how Korea's weakening household debt servicing ability will affect CKI, Fitch does not think the country's household debt level is a serious issue yet. Korea has quite strong job security with strong labour laws. The banking sector's one-month delinquency rate for household loans was just 0.3% at end-1H16, reflecting various borrower friendly measures by the local authorities. The average LTV of mortgages, which account for the bulk of the household loans, is around mid-50% level.
RATING SENSITIVITIES
IDRS AND SUPPORT RATING
The IDRs and Support Rating are sensitive to any change to Citigroup's ratings or CKI's relationship with its parent. They would also be affected by the evolution of Citigroup's recovery and resolution plan.
VIABILITY RATING
The bank's VR is sensitive to a change to Fitch's assumptions around CKI's company profile, underlying profit structure and operating environment.
Fitch may downgrade the VR if CKI's shrinking franchise and high cost base lead to a further weakening in the business model. However, the medium-term business conditions are expected to stabilise and gradually improve which should support profitability of the bank and stabilise the business model.
Fitch does not expect to upgrade the VR in the near future because of CKI's shrinking franchise and low underlying profitability. The VR is also limited by CKI's large exposure to non-mortgage retail loans.
The rating actions are as follows:
CKI
Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1'
Viability Rating affirmed at 'bbb+'
Support Rating affirmed at '1'
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