BANK OF KAOHSIUNG CO., LTD.
Fitch Ratings has affirmed
The Outlook is Stable. A full list of rating actions is below.
Fitch has withdrawn BOK's Support Rating '2' and Support Rating Floor 'BBB+' because they are no longer relevant to the agency's coverage following the publication of our updated Bank Rating Criteria on
Key Rating Drivers
Government Support Drives IDRs:
Higher Short-Term Rating: BOK's Short-Term IDR of 'F1' is at the higher of the two options that map to its Long-Term IDR. This reflects our view that potential for simultaneous deterioration in the liquidity profile of both
High National Rating Scale: BOK's 'AA-(twn)' National Rating is at the high end of our national rating scale, reflecting low default risk relative to issuers in
Weakest Link in Capitalisation: BOK's VR 'bb+' is below its implied VR 'bbb-' because the bank's capitalisation and leverage score (bb+/stable) represents the bank's weakest link and has a strong impact on our overall view of the bank's intrinsic credit profile.
Stable Operating Environment: The operating environment score of 'a'/stable is backed by our forecast for
Modest Franchise: BOK is a price-taker in the lending business, given its small franchise in
Average Risk Profile: BOK has a higher exposure to the SME and domestic property sectors relative to peers; the two sectors accounted for 40% and 19%, respectively, of its total loans at end-1H22. Nevertheless, we do not view BOK's overall risk profile as significantly higher than the domestic peer average, as the bank focuses heavily on secured lending; secured loans were 74% of its total loans at end-1H22. Risks associated with the bank's loan concentration are also mitigated by its modest and stable loan/value ratio of around 51% for secured loans.
Adequate Asset Quality: BOK's asset quality score of 'bbb' is lower than the implied 'a' category score on its high concentration in SMEs and the domestic property sector, particularly in commercial real estate (CRE) and land or construction lending. We regard CRE and land or construction lending as higher risk than residential secured lending. Our assessment also takes into consideration BOK's quasi-policy role, which could at times influence its underwriting standards and heighten asset quality risks.
The impaired loans ratio fell to 0.9% by end-1H22 (end-2020: 1.2%), on fewer impaired loan formations in 2021-1H22 because of relief measures as well as loan recoveries.
Improved Profitability: We have raised BOK's earnings and profitability score to 'bb+'/stable from 'bb'/positive to reflect sustainable improvement in profitability in recent years. We expect BOK's operating profit/risk-weighted asset (RWA) ratio to stay around 0.7% in 2022-2023 (four-year average of 0.5% in 2018-2021), on a higher net interest margin (NIM) amid interest rate rises, steady fee income growth and modest credit costs. The annualised operating profit/RWA ratio rose to 0.8% in 1H22 (2021: 0.6%), on strong loan recoveries and higher NIM and fees.
Modest Core Capitalisation: We have revised the outlook on BOK's capitalisation and leverage score of 'bb+' to stable from positive despite improvement in recurrent profitability in recent years. This is because the common equity Tier 1 (CET1) ratio fell to 8.6% by end-1H22 (end-2021: 9.7%), on mainly negative valuation adjustments in other comprehensive income (OCI) investments as rates rose. The valuation adjustments are mark-to-market in substance but are unlikely to be reversed in the near term until the investments mature.
We expect the bank's CET1 ratio to improve gradually but it is likely to stay below 9% by end-2024 in the absence of any new equity. We believe there is uncertainty whether BOK can successfully improve its core capitalisation, as any rights issue is likely to require support from KCG, and KCG in turn would require
Small Deposit Franchise: BOK's funding and liquidity score of 'bbb+' is lower than the implied 'a' category score due to its small deposit franchise. Its loan/deposit ratio declined to 74% by end-1H22, from 76% at end-2021, on reduced loans to KCG during the period. We expect the decline in the loan/deposit ratio will not be sustained, as the bank intends to expand other non-government loans and aims to increase the ratio towards 80% over the medium term. We estimate its loan/deposit ratio should return to around 77% by end-2023.
Lowering Expensive Time Deposits: High-cost time deposits decreased to 43% of its total deposits by end-1H22, lower than 50% at end-2020, as BOK aims to improve its profitability.
High Probability of Government Support: BOK's GSR of 'bbb+' reflects a high probability of support from the KCG, and ultimately from the Taiwanese government (AA/Stable), if needed. This is based on KCG's controlling stake in the bank, BOK's close ties with the city government and the bank's systemic importance within Kaohsiung.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRS AND GSR
A significant weakening in linkage between BOK and KCG, such as in terms of ownership and control, could lead to downgrades in the bank's GSR and IDRs.
BOK's Short-Term IDR would be downgraded if its Long-Term IDR is downgraded to 'BBB' or below.
VR
Negative rating action could arise if the bank significantly increases its growth appetite and compromises its underwriting standards. Its VR could be downgraded if the bank's impaired loans ratio were to approach 3% from 0.9% at end-1H22, the operating profit/RWA ratio were to drop to below 0.3% or the CET1 ratio were to drop below 8% with no credible plans to return to its current levels.
NATIONAL RATINGS
A downgrade of BOK's National Ratings would arise from a weakening in its overall credit profile on a relative basis to the rated universe of issuers in
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRS AND GSR
BOK's GSR and IDRs are sensitive to changes around the Taiwanese government's perceived propensity to support BOK. Hence, there may be upside to the ratings if Fitch assesses that BOK's policy role is clearer or more prominent than currently envisaged.
BOK's Short-Term IDR would be upgraded if its Long-Term IDR is upgraded to 'A' or above.
VR
BOK's VR could be upgraded if the bank's capitalisation improves to levels that are more comparable with higher-rated peers while maintaining stable risk appetite, asset quality and profitability. For example, such improvement may be reflected in BOK's CET1 ratio rises towards 10% on a sustained basis.
NATIONAL RATINGS
Changes in Fitch's perception of BOK's credit profile relative to the rated universe of issuers in
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
BOK's Basel III-compliant Tier 2 (B3T2) bond's 'A(twn)' National Rating is two notches below its National Long-Term Rating of 'AA-(twn)'. This comprises zero notching for non-performance risk and two notches for loss severity, reflecting the poor recovery prospects for B3T2 debt.
The anchor rating for the subordinated bonds is BOK's support-driven National Long-Term Rating. This is because Fitch believes that KCG and the Taiwanese government have a strong interest in supporting BOK to fulfil the bank's financial obligations.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Any change to BOK's National Long-Term Rating is likely to trigger a similar change in its debt ratings. Hence, a downgrade of BOK's National Long-Term Rating could lead to a downgrade of the subordinated debt.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of BOK's National Long-Term Rating could lead to an upgrade of its subordinated debt.
VR ADJUSTMENTS
The asset quality score of 'bbb' has been assigned below the 'a' category implied score for the following adjustment reason: concentration (negative).
The funding and liquidity score of 'bbb+' has been assigned below the 'a' category implied score for the following adjustment reason: deposit structure (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
BOK's IDRs and National Ratings are driven by its GSR, which reflects a high probability of support from KCG, which owns a controlling 43% stake in the bank, and ultimately from the Taiwanese government, which will flow through the city government, if needed.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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