Fitch Affirms Shinhan Entities; Card's Outlook Revised to Negative

Shinhan Financial

11/09/2018 10:37

(The following statement was released by the rating agency)


Fitch Ratings-Seoul-September 11: Fitch Ratings has affirmed South Korea-based 
Shinhan Bank's (SHB) Long-Term Issuer Default Rating (IDR) at 'A' with a Stable 
Outlook. Fitch has simultaneously affirmed Shinhan Card Co., Ltd.'s (SHC) 
Long-Term IDR at 'A-' but the Outlook has been revised to Negative from Stable. 

The rating actions follow their parent Shinhan Financial Group's (SFG) decision 
to acquire a 59.2% stake in Orange Life Insurance Co., Ltd. (formerly ING Life 
Insurance Korea, Ltd.) for about KRW2.3 trillion on 5 September 2018. Fitch 
believes the acquisition will enhance the group's business model, franchise and 
earnings in the medium to longer term but at the cost of weaker capitalisation 
and higher leverage. A full list of rating actions is at the end of this 
commentary.

KEY RATING DRIVERS 

The different Outlooks on SHB and SHC mainly reflect Fitch's belief of a strong 
regulatory bias in Korea towards prioritising the protection of the creditors or 
depositors of an operating bank over the creditors of the rest of the holding 
company's units. Deploying capital or liquidity directly from the operating bank 
to support the other parts of the group, including the holding company, would be 
quite onerous in Korea. The Korean regulator has not been hesitant in pressuring 
holding companies to strengthen their operating banks' capitalisation at the 
parents' cost by issuing debt to inject into the subsidiaries, which often 
increased the risk of the bank holding companies' creditors through a higher 
common-equity double-leverage ratio. 

On the other hand, we think SHC's credit profile is more directly linked to that 
of the parent. SHC's ratings are driven by potential support from its parent, 
whose credit strength is assessed as greater than SHC's standalone credit 
profile. That said, SFG's ability or flexibility to support the credit card 
company is weakening as the acquisition is financed mostly by additional Tier 1 
capital and senior unsecured debt. 

Fitch forecasts the common-equity double-leverage ratio of the bank holding 
company could rise to as much as 140% after the acquisition from 126% currently. 
We also estimate the group's Fitch Core Capital ratio, which measures its 
consolidated capital, will be cut by about 1.1 percentage points. Fitch does not 
consider Korea's additional Tier 1 capital to be the same as common equity or 
high-quality loss-absorbing capital because the principal absorbs losses only 
when the issuer becomes insolvent. We also deduct equity interests in affiliated 
insurance businesses from Fitch Core Capital because they relate to life 
assurance operations first and foremost and would not be available to absorb 
losses in banking operations. 

SFG's leverage and capitalisation could further weaken if the parent were to buy 
out the remaining minority shareholders of Orange Life and/or inject capital 
into its subsidiaries to support growth. The group injected KRW500 billion into 
its brokerage arm in 3Q16 to improve its competitiveness. 

IDRS, VIABILITY RATING AND SENIOR DEBT - SHB

The bank's IDRs, Viability Rating and senior debt ratings are underpinned by the 
bank's strong local franchise and diversified business model as well as its 
stable management, which has built a high degree of credibility among major 
constituencies by consistently executing strategy to deliver steady performance 
through the economic cycle.  

Fitch expects SHB's financial profile to remain steady for the next two years, 
underpinned by a sound risk-control framework and a stable operating 
environment. Fitch believes Korea's high household debt is not a near-term issue 
yet as we anticipate a gradual policy rate hike and a steady local property 
market over the next few years. 

The bank's performance in 1H18 was slightly better than we expected. However, we 
anticipate increasing headwinds for the banking system because of rising 
uncertainty from global trade tensions. 

SFG's acquisition of the life insurer could negatively affect SHB's 
capitalisation if it is pressured to pay more dividends in support of its 
parent's financial obligation. Nevertheless, we expect SHB's capitalisation to 
remain broadly steady in the medium term, mainly because of the local 
regulator's position on the safeguarding of operating banks against the risk of 
deterioration in preparation for a bail-in regime, which has been delayed in 
Korea since 2016.

Fitch believes SHB is somewhat insulated from developments in the other parts of 
the group, although the credit risk of the bank cannot be completely de-linked 
from the overall credit strength of the group.  

 

SUPPORT RATING AND SUPPORT RATING FLOOR - SHB

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 SHB's systemic importance as one of 
the country's largest commercial banks, holding 13% of the banking system's 
total loans and 16% of deposits.

SUBORDINATED DEBT - SHB

SHB's Basel III-compliant Tier 2 debt is rated two notches below the bank's IDR. 
This reflects Fitch's poor recovery expectations due to the notes' subordinated 
status and because they are to be fully and permanently written off upon hitting 
the point of non-viability.

Fitch uses the support-driven IDR or Viability Rating, whichever is higher, as 
the anchor rating for Korea's systemically important banks' Tier 2 instruments, 
including those of SHB. This is because the Tier 2 instruments will be 
non-performing or will reach a point of non-viability when the issuing bank 
becomes insolvent or defaults. This is similar to the point at which senior debt 
is considered to be in default. However, Fitch expects the government to provide 
pre-emptive support to avoid insolvency. SHB's notes have minimal 
non-performance risk relative to its senior unsecured debt.

 

For more details on Fitch's approach to rating Basel III-compliant Tier 2 notes, 
see Fitch: 
Korean Basel III Terms Become More Creditor Friendly /a , dated 26 September 
2014.

IDRS AND SUPPORT RATING - SHC

SHC's IDRs and Support Rating reflect Fitch's belief that its parent SFG would 
provide support to SHC, if needed. Fitch sees SHC's credit card operation as an 
integral part of SFG's commercial-banking franchise, which has become more 
retail-based in the past few years. The group's business model and competitive 
position would be altered significantly without SHC in light of its 20%-30% 
contribution to SFG's profit for several years. 

Fitch believes the local regulator would favour support of SHC by SFG, similar 
to its actions during Korea's credit card crisis in 2003, due to the strong 
synergies with SHC in the retail banking operation and the importance of the 
credit card industry to Korea's economy. The country's credit card transaction 
volume reached over 70% of private consumption in 2017. SHC is the largest 
credit card company with about 20% of Korea's total domestic credit card 
transactions in 2017.

The Negative Outlook on the Long-Term IDR reflects the weakening ability or 
flexibility of SFG to support the credit card company.

RATING SENSITIVITIES

IDRS, VIABILITY RATING AND SENIOR DEBT - SHB

The bank's IDRs, Viability Rating and senior debt ratings are sensitive to a 
change in Fitch's assumptions about its management, risk appetite and 
capitalisation. 

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 
erosion of its capitalisation. Downgrade action could also be triggered, 
contrary to our expectation, if there is any sign of significant weakening in 
the bank's capitalisation (or increase in the bank's dividend burden) due to 
developments in other parts of the group. 

Downside to the IDR is limited to one notch, as SHB's Support Rating Floor is 
'A-'.

The ratings are unlikely to be upgraded in the near term in light of the 
weakening financial flexibility of its parent, SFG.

SUPPORT RATING AND SUPPORT RATING FLOOR - SHB

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

Furthermore, global regulatory initiatives aimed at lowering implicit government 
support available to banks may cause downward pressure on the ratings. The local 
regulator may revise its resolution framework to add a bail-in feature. However, 
it remains to be seen how strong the language will be and how feasible it will 
be to enforce a bail-in in practice. The timeline for this change remains 
unclear as the revision has already been delayed since late 2016.

SUBORDINATED DEBT - SHB

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

IDRS AND SUPPORT RATING - SHC

SHC's IDRs and Support Rating are sensitive to any change in assumptions around 
the propensity or ability of SFG and SHB to provide timely support. 

The ratings could be downgraded if there is no sign of a noticeable and 
significant improvement in SFG's capitalisation and common-equity double 
leverage in a few years. Fitch may also take rating action if there is a change 
in SHB's IDRs or SHC's relationship with SFG and SHB.

Given the Negative Outlook, a rating upgrade is improbable for the foreseeable 
future. 

The rating actions are as follows: 

SHB

Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable

Short-Term Foreign-Currency IDR affirmed at 'F1'

Viability Rating affirmed at 'a'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A-'

Long-term senior unsecured debt affirmed at 'A'

Subordinated Basel III compliant Tier 2 debt affirmed at 'BBB+'

SHC

Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook revised to Negative 
from Stable

Short-Term Foreign-Currency IDR affirmed at 'F1'

Support Rating affirmed at '1'

Contact: 

Primary Analysts 

Heakyu Chang (SHB)

Senior Director

+82 2 3278 8363

Fitch Australia Pty Ltd, Korea Branch

9F Kyobo Securities Building

97, Uisadang-daero, Yeongdeungpo-Gu

Seoul 07327, South Korea

Matt Choi (SHC)

Associate Director

+82 2 3278 8372

Secondary Analysts

Matt Choi (SHB)

Associate Director

+82 2 3278 8372

Jonathan Lee (SHC)

Managing Director

+886 2 8175 7601

Committee Chairperson 

Wee Siang Ng, CFA

Senior Director

+65 6796 7230

Summary of Financial Statement Adjustments - Fitch also considered SHB'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.

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

Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 22 Jun 2018)

https://www.fitchratings.com/site/re/10034713

Non-Bank Financial Institutions Rating Criteria (pub. 22 Jun 2018)

https://www.fitchratings.com/site/re/10034715

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https://www.fitchratings.com/site/dodd-frank-disclosure/10043926

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https://www.fitchratings.com/site/pr/10043926#solicitation

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https://www.fitchratings.com/regulatory

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