Fitch Affirms Shinhan Bank at 'A'; Outlook Stable

Shinhan Financial

30/04/2019 10:37

(The following statement was released by the rating agency)


Fitch Ratings-Seoul-April 30: 

Fitch Ratings has affirmed South Korea-based Shinhan Bank's Long-Term Issuer 
Default Rating (IDR) at 'A'. The Outlook is Stable. Fitch has also affirmed 
Shinhan's Viability Rating at 'a'. A full list of rating actions is at the end 
of this commentary.

Key Rating Drivers

IDRS, VIABILITY RATING AND SENIOR DEBT

The bank's IDRs, Viability Rating and senior debt ratings are underpinned by its 
solid company profile with a strong local franchise and diversified business 
model with gradually increasing overseas contributions, and a stable management 
with a high degree of credibility among major constituencies. Shinhan has stood 
out among Korean banks for its strong risk management and consistent execution 
of strategy to deliver a steady performance throughout economic cycles. The 
ratings also take into account the bank's steady but weaker profitability than 
international peers and Korea's challenging but relatively strong macroeconomic 
environment.

The Stable Outlook reflects Fitch's expectation that Shinhan's overall financial 
profile will remain firm for the next two years as its risk appetite has been 
broadly steady in recent years.

Fitch believes Korea's high household debt is not a near-term issue yet as we 
anticipate gradual policy rate hikes and a broadly steady local property market 
over the next few years. The system's underwriting standards have been generally 
conservative and have become tighter due to the local authorities' prudential 
measures to ease financial imbalances, improve debt serviceability and cool 
property markets. We estimate the current loan-to-value ratio of mortgages, 
which account for about 60% of Korean household debt, at around 55%. Korea's 
cooling but relatively stable employment market is also a supportive factor in 
the short-to-medium-term.

Notwithstanding that, we think Korea's high household leverage, compounded by 
the country's rapidly ageing population, makes the economy less resilient to 
shocks and pressures domestic consumption andbusiness growth in the longer term.

Fitch expects Shinhan's impaired-loan ratio (0.5% at end-2018) to remain modest. 
Shinhan has a strong track record of a more balanced loan portfolio relative to 
its competitors and has demonstrated its ability to limit exposure to troubled 
sectors ahead of local peers. We think the prevailing impaired-loan ratios of 
Korea's commercial banks are at cyclically low levels in part thanks to the 
broadly accommodative measures by local authorities. A tightening in regulatory 
prudential measures is likely to lead to more subdued near-term loan growth.

Fitch anticipates Shinhan's operating profit/risk-weighted asset ratio to 
decline slightly in 2019, considering Korea's slowing economic growth. The 1.9% 
recorded in 2018 was the highest since 2011 (2.1%) in part benefitting from 
historically low credit costs. A gradual improvement in operational efficiency 
and an expanding overseas operation would contribute to a gradual improvement in 
Shinhan's profitability in the long term.

Shinhan's Fitch Core Capital ratio (14.7% before taking into account additional 
risk-weighted assets from the regulatory capital floor at end-2018) is likely to 
remain steady over the next few years despite the bank's modest loan growth 
plan. We think dividend pressure has increased because Shinhan's parent, Shinhan 
Financial Group Co., Ltd., has been acquisitive in non-bank operations, although 
the dividend burden has been largely shared by Shinhan's sister credit-card 
company. 

We expect Shinhan's stable funding profile to be sustained with modest loan 
growth in 2019. Shinhan's reputation of sound risk control, if sustained, will 
benefit its funding, especially when the banking system is under severe stress. 
Korea's large commercial banks including Shinhan have a relatively moderate 
funding and liquidity profile compared with similarly rated international peers.

SUPPORT RATING AND SUPPORT RATING FLOOR

The bank's Support Rating and Support Rating Floor reflect Fitch's continued 
belief of an extremely high probability of support from the Korean government 
(AA-/Stable), if required. This is based on Shinhan's systemic importance as one 
of the country's largest commercial banks, holding 12% of the banking system's 
total loans and 14% of deposits.

SUBORDINATED DEBT

Shinhan's Basel III-compliant Tier 2 debt is rated two notches below its IDR. 
The notching reflects the poor recovery prospects of the gone-concern 
loss-absorption instruments with no coupon payment flexibility relative to 
senior unsecured instruments because of their subordinated status with a full 
and permanent write-off feature.

The notes would be fully and permanently written off if the bank reaches the 
point of insolvency or default, a similar point at which senior unsecured debt 
is considered to be in default. As such, the notes have minimal non-performance 
risk relative to the bank's senior unsecured debt.

Rating Sensitivities

IDRS, VIABILITY RATING AND SENIOR DEBT

The bank's IDRs, Viability Rating and senior debt ratings are sensitive to a 
change in Fitch's assessment of Shinhan's management, company profile, risk 
appetite and financial profile. The ratings could be upgraded if management's 
prudent approach to risk appetite and consistent strategic execution lead to a 
sustainable improvement in the bank's financial strength or company profile.

The ratings could be downgraded if there is a significant increase in the bank's 
risk appetite, including rapid growth or weakened loan quality, leading to a 
sustained erosion of its capitalisation. A negative rating action could also be 
triggered by a substantial weakening in the parent's consolidated risk profile 
or double leverage ratio (about 137% at end-1Q19), potentially due to a major 
non-bank subsidiary acquisition, if it significantly increases the bank's 
dividend burden.

Downside to the IDR from changes in the VRis limited to one notch as Shinhan's 
Support Rating Floor is 'A-'.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating and Support Rating Floor may be sensitive to any change in 
Fitch's assessment of the propensity or ability of the Korean authorities to 
provide timely support to the bank. This might arise if there is a change to 
Korea's sovereign rating.

Amaterial change in Korea's resolution framework aimed at lowering implicit 
government support available to banks may cause downward pressure on the 
ratings. However, there has been limited progress in the legislation of key 
features such as a bail-in and the timeline has become unclear since late 2016. 
Fitch will assess the strength of the language and the feasibility of enforcing 
the bail-in legislation in practice when a draft is available.

SUBORDINATED DEBT

The ratings on the Basel III-compliant Tier 2 securities are sensitive to the 
same considerations that might affect Shinhan's Long-Term IDR, which is driven 
by its Viability Rating.

Summary of Financial Adjustments

Fitch also considered Shinhan's risk-weighted assets before the capital floor 
charge, which is harsher than for international peers because of stricter 
capital deduction requirements under Korea's regulatory framework. 

Please note that only the Bank Rating Criteria (published 12 October 2018) was 
used in the analysis for this rating action.

Shinhan Bank; Long Term Issuer Default Rating; Affirmed; A; RO:Sta

; Short Term Issuer Default Rating; Affirmed; F1

; Viability Rating; Affirmed; a

; Support Rating; Affirmed; 1

; Support Rating Floor; Affirmed; A-

----senior unsecured; Long Term Rating; Affirmed; A

----subordinated; Long Term Rating; Affirmed; BBB+

Contacts: 

Primary Rating Analyst

Heakyu Chang, 

Senior Director

+822 3278 8363

Fitch Australia Pty Ltd, Korea Branch

9F Kyobo Securities Building 97 Uisadang-daero, Youngdeungpo-gu

Seoul 07327

Secondary Rating Analyst

Matt Choi, 

Director

+82 2 3278 8372

Committee Chairperson

Parson Singha, 

Senior Director

+66 2 108 0151

 

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 12 Oct 2018)

https://www.fitchratings.com/site/re/10044408

National Scale Ratings Criteria (pub. 18 Jul 2018)

https://www.fitchratings.com/site/re/10038626

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https://www.fitchratings.com/site/dodd-frank-disclosure/10072214

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https://www.fitchratings.com/site/pr/10072214#solicitation

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https://www.fitchratings.com/regulatory

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