Fitch revises StanChart Korea's outlook to negative to align with parent group

SCB will likely provide support, if needed.

Fitch Ratings has revised the Outlook on Standard Chartered Bank Korea Limited (SCBK) to Negative from Stable while affirming its Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AA-'. Fitch has also downgraded SCBK's Viability Rating (VR) to 'bbb' from 'bbb+'.

According to a release from Fitch Ratings, the revision of the Outlook to Negative from Stable reflects a similar change on the Outlook of SCBK's parent, Standard Chartered Bank (SCB), on 1 October 2014.

SCBK's IDRs and Support Rating of '1' reflect Fitch's belief that there is an extremely high probability that its parent SCB will provide extraordinary support for the Korean subsidiary, if needed.

As a result, Fitch equalises SCBK's IDRs with SCB's. SCBK is wholly owned by SCB and shares the same brand name. It is a core part of SCB's extensive international transaction banking operation.

SCBK's ratings would be directly affected if SCB's ratings or its relationship with its parent were to change.

Here’s more from Fitch Ratings:

The downgrade of SCBK's VR reflects its weakened profitability (relative to domestic peers) and company profile through strategic downsizing or repositioning, which are indicative of the challenges that management face in a competitive market such as Korea.

Since being acquired by SCB in 2005, its development in the local market has been limited, with its operations failing to build the scale needed to overcome high personnel and general and administrative (G&A) expenses.

Its local franchise has also weakened because its balance sheet shrank as part of efforts to reposition its business, with its market share in key segments declining by about 1pp to 3% in recent years.

Meanwhile, its reliance on potentially volatile derivative operations has increased relative to its underlying profitability. Past efforts to boost profitability by tapping higher-risk unsecured customers have seen limited reward.

It intends to reposition its operations, but Fitch expects only gradual improvement over time considering the challenging local operating environment, including the low interest rate cycle.

SCBK's overall asset quality is sound. It has stopped extending unsecured loans to subprime individuals and has been shedding higher-risk loans.

Its customer loan book shrank by 6% in 1H14, following a cumulative 19% contraction over the five years to end-2013.

Fitch forecasts SCBK's return on assets (ROA) for the next few years to be negligible even by local standards.

For 2014, the agency anticipates SCBK reporting a net loss with estimated ROA of -0.1%, following the policy rate cut by the Bank of Korea in 3Q14.

As a result, internal capital generation will be modest with limited buffer to offset any unexpected shocks. Its assets and liabilities are strongly linked to interest rate hikes.

Thanks to the downsizing of its balance sheet, its capitalisation and liquidity/funding profile have improved noticeably.

Any further improvement would likely be incremental unless SCBK was to continue meaningful downsizing.

However, to do so would risk further reducing its already low profitability. SCBK relies heavily on the Standard Chartered group for its foreign currency funding, and that is likely to remain stable.

Upside potential for SCBK's VR may arise if there is a significant structural reduction in its personnel and G&A expenses, reduced reliance on volatile derivative operations, and/or local management putting in place a sustainable strategy that better positions the bank to both grow more meaningfully and compete more effectively against domestic banks.

A further downgrade of the VR is not likely in the near term providing the bank maintains its capitalisation and asset quality at appropriate levels and does not meaningfully increase its risk appetite.