OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+(EXP)' expected rating to South Korea based Shinhan Bank's (Shinhan; A/Stable) proposed US dollar denominated subordinated unsecured notes.

This is Shinhan's first offshore issue of a Basel III-compliant Tier 2 instrument. Fitch expects the notes to have an issue size of USD500m and a tenor of 10 years. Shinhan will use the proceeds to strengthen its Tier 2 regulatory capital position and for general corporate purposes. The notes will be issued under Shinhan's USD6bn global medium term note programme, last updated on 15 March 2016. The final rating is contingent upon the receipt of final documents conforming to the information already received.

KEY RATING DRIVERS

Fitch rates the Basel III Tier 2 notes two notches below Shinhan's Long-Term Issuer Default Rating (IDR), which in turn is driven by its 'a' Viability Rating (VR). This reflects the notes' high loss-severity relative to senior unsecured instruments due to their subordinated status. If the notes reach the point of non-viability (PONV), they will be fully and permanently written off. This means investors would not recover any of their investment.

Shinhan is one of South Korea's key domestic systemically important banks. Fitch believes the anchor rating best reflecting the risk of Shinhan triggering the non-viability event is the IDR, which is the higher of VR and the Support Rating Floor. South Korea's banks would reach a PONV when designated as an insolvent financial institution (FI) as defined in Article 2 of the Act on the Structural Improvement of the Financial Industry. The Act says an FI becomes insolvent if:
- its liabilities exceed its assets,
- it is under suspension of payment of claims, such as deposits, or redemption of money borrowed from other FIs, or
- the Financial Services Commission or Deposits Insurance Committee deems it is unable to pay claims, such as deposits, or redeem borrowed money without external support.

This effectively means the PONV is reached upon insolvency or default, which is a similar point at which senior unsecured debt is considered to be in default. As a result, Fitch believes investors of both senior unsecured and subordinated debt would benefit from pre-emptive support from the local authorities given Shinhan's systemic importance.

For more details on Fitch's approach to rating Basel III-compliant Tier 2 notes, see the non-rating action commentary "Fitch: Korean Basel III Terms Become More Creditor Friendly", dated 26 September 2014 and available at www.fitchratings.com

RATING SENSITIVITIES
Any change in Shinhan's Long-Term IDR, which is currently driven by VR, would affect the rating of these notes. The downside to the IDR would be limited to one notch given that the current Support Rating Floor for Shinhan is at 'A-'. For more details on the drivers and sensitivities of Shinhan's VR, see "Fitch Affirms Shinhan Bank at 'A'/Stable", dated 29 May 2015, available at www.fitchratings.com

Shinhan's other ratings are as follows:
Long-Term IDR rated at 'A'; Outlook Stable
Short-Term IDR rated at 'F1'
Viability Rating rated at 'a'
Support Rating rated at '1'
Support Rating Floor rated at 'A-'
Senior unsecured debt rated at 'A'
Hybrid capital (legacy Tier 1) securities rated at 'BBB-'.