OREANDA-NEWS. Fitch Ratings has today downgraded the Long-Term and Short-Term Foreign-Currency Issuer Default Ratings (IDRs) on Standard Chartered Bank Korea Limited (SCBK) to 'A+' from 'AA-' and 'F1' from 'F1+'. The Outlook remains Negative. At the same time, Fitch has affirmed the Viability Rating at 'bbb'. A full list of rating actions is at the end of this Rating Action Commentary.

The downgrade of the IDRs on SCBK reflects a similar change to the IDRs on SCBK's ultimate parent, Standard Chartered PLC (SC; A+/Negative), on 5 November 2015 (see "Fitch Downgrades Standard Chartered to 'A+', Maintains Negative Outlook" at www.fitchratings.com).

KEY RATING DRIVERS

IDRS AND SUPPORT RATING
The bank's IDRs and Support Rating reflect Fitch's continued belief of an extremely high probability that SCBK's ultimate parent SC will provide extraordinary support for the Korean subsidiary, if required. As a result, Fitch equalises SCBK's IDRs with those of SC. SCBK, operating in South Korea with substantial exports, is a core part of SC's extensive international transaction banking operation. SCBK is wholly owned by SC, and shares the same brand name.

It remains to be seen how SCBK will be affected by SC's new strategy, announced on 3 November 2015, to restructure about a third of group risk-weighted assets, of which USD10bn stems from Korea. Fitch views the announcement as a continued commitment towards turning around the retail and commercial banking business in Korea while improving the returns in the corporate and institutional division - notwithstanding that Korea's business environment has proven very challenging for a foreign-owned entity like SCBK.

The Negative Outlook reflects the Negative Outlook on SC.

VIABILITY RATING
SCBK's 'bbb' Viability Rating (VR) reflects in large part its weak profitability and company profile relative to domestic peers, and adequate balance-sheet strength. It also takes into account the challenging operating environment in Korea and SCBK's rather strong risk appetite.

SCBK's balance sheet has shrunk, and its market shares in key segments have declined by about 1pp-2pp to 2%-3% since 2010 as SCBK tried to reposition its business amid the slowing economic environment and intensive competition in South Korea. The bank has also been unable to reduce its staff in line with its smaller scale. SCBK's strategic repositioning continues to detract from the scale needed to support its high personnel and general and administrative (G&A) expenses.

Fitch does not expect any significant change in SCBK's risk appetite in the short term, at least. SCBK's overall asset quality is sound. It has stopped extending unsecured loans to subprime individuals, and has been shedding higher-risk loans since mid-2013. Its customer loan book shrank by 28% from 2011 to mid-2015, compared with the local commercial banks' average of 18% growth.

Fitch estimates the upper band of SCBK's return on assets (ROA) for the next few years to be 0.4%, leaving a limited buffer against unexpected shocks. SCBK reported net losses in 2014 (-0.1% ROA). SCBK's net profit is more dependent on the volatile income from its substantial trading operation. Fitch expects the bank to reduce its dependence on this segment only gradually because of the challenging local operating environment, including the low-interest-rate cycle.

The smaller balance sheet has resulted in a stronger capitalisation and liquidity/funding profile. SCBK's Fitch Core Capital ratio was 13.9% at mid-2015, compared with the Korean commercial bank average of 12.7%. SCBK's average risk weight had also improved to 48% by mid-2015 from 54% at end-2013 as it reduced higher-risk loans. SCBK's loans/customer deposits ratio had improved significantly to 121% by end-2014 from 154% at end-2011 because of deleveraging in lending, not because of expansion in its deposit base.

RATING SENSITIVITIES

IDRS AND SUPPORT RATING
The IDRs and Support Rating are sensitive to any change in assumptions around the propensity or ability of SC to provide timely support. SCBK's ratings would be directly affected if its importance to the group or SC's ratings were to change.

VIABILITY RATING
The bank's VR is sensitive to a change to Fitch's assumptions around SCBK's underlying profit structure, company profile, and operating environment.

Fitch may upgrade SCBK's VR if there is a significant structural reduction in its personnel and G&A expenses, reduced reliance on income from volatile trading operations, and/or a sustainable strategy that puts the bank in a better position to expand and compete more effectively against domestic banks.

Fitch does not expect a downgrade of the VR in the near term unless its balance-sheet strength deteriorates significantly, which may happen if SCBK increases its risk appetite significantly.

The rating actions are as follows:

SCBK
Long-Term Foreign-Currency IDR downgraded to 'A+' from 'AA-'; Outlook Negative
Short-Term Foreign-Currency IDR downgraded to 'F1' from 'F1+'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '1'.