Rating Action: Moody's assigns Aa2 long-term deposit ratings to KEXIM ASIA LIMITED
Global Credit Research - 23 Dec 2020
Hong Kong, December 23, 2020 -- Moody's Investors Service has assigned first-time Aa2 long-term deposit ratings and P-1 short-term deposit ratings to KEXIM ASIA LIMITED.
The outlook on the ratings is stable.
The full list of ratings and assessments is provided at the end of this press release.
RATINGS RATIONALE
KEXIM ASIA's ratings are in line with that of its parent The Export-Import Bank of Korea (KEXIM, Aa2 stable), supported by Moody's assumption of indirect support from the Government of Korea (Aa2 stable) through the parent, in times of need.
Moody's government support assumption considers (1) KEXIM ASIA's strategic importance to KEXIM's Asian franchise as its largest subsidiary in terms of assets; (2) the reputational risks that would arise for both KEXIM and KEXIM ASIA as they share the same name and both are heavily reliant on market funding; and (3) Article 37 of the KEXIM Act, which sets out the government's obligation to replenish any payment deficits if KEXIM's reserves are insufficient. Although the act does not specifically cover KEXIM ASIA, Moody's still expects indirect government support for the bank because KEXIM's capitalization encompasses KEXIM ASIA, and as a subsidiary the bank is included in a cross default clause in KEXIM's foreign currency debt in the event of a default.
Moody's has also considered the fact that KEXIM ASIA will receive timely support from its parent, because there are no restrictions in Korea for supporting overseas financial subsidiaries and the government has the capacity to provide support, given its very high institutional and fiscal strength.
Deposit and issuer ratings
KEXIM's Aa2 deposit and issuer ratings reflect (1) its Baseline Credit Assessment (BCA) and Adjusted BCA of baa2; (2) a two-notch uplift per Moody's Loss Given Failure (LGF) analysis; and (3) a four-notch uplift based on Moody's assessment of indirect support from the Korean government (Aa2 stable) through its parent, in times of need.
KEXIM ASIA's baa2 BCA incorporates its (1) Strong macro profile that reflects the weighted average of Korea's macro profile of Strong and Asia Pacific ex Japan's Moderate+; (2) solid capitalization, which Moody's expects will be maintained thanks to capital injections from KEXIM; (3) liquid balance sheet, which mostly comprises of investment-grade debt instruments; (4) moderate asset quality, with the top 20 loan concentration exceeding 200% of its tangible common equity as of the end of June 2020; (5) modest profitability; and (6) weak funding due to high reliance on interbank borrowing, a risk that is mitigated by existing credit lines with KEXIM that Moody's expects will be available during times of stress.
KEXIM ASIA is strategically important to its parent because the bank plays a key role for KEXIM as the operating entity of its principal commercial banking and investment banking business in Asia including China (A1 stable) and Hong Kong (Aa3 stable). As a result, KEXIM ASIA has received a USD100 million cash equity injection from KEXIM in August 2020 to support its role.
Moody's regards KEXIM ASIA's close integration with KEXIM in risk management as a governance strength under its environmental, social and governance (ESG) framework, given the implications for the company's financial strategy and risk management. Today's action reflects KEXIM ASIA's effective integrated intra-group governance which led to the bank's relatively stable asset quality. For example, the company is allocated a risk asset growth target from the headquarter on an annual basis, which is monitored on a monthly basis and shares risk management and cyber risk management systems with the group.
KEXIM ASIA is subject to Hong Kong's Financial Institutions (Resolution) Ordinance and Moody's considers Hong Kong an operational resolution regime. Moody's therefore applies the Advanced Loss Given Failure (LGF) approach in rating KEXIM ASIA.
Moody's Advanced LGF analysis leads to a two-notch uplift for depositors from the bank's Adjusted BCA of baa2, due to likely low loss in potential non-viability given loss absorption provided by senior unsecured debt and shareholder's equity. Issuer ratings also benefit from a two-notch uplift based on the LGF analysis due to the large volume of expected future senior unsecured liabilities, and the volume of shareholder's equity.
Counterparty Risk (CR) Assessment and Counterparty Risk Rating (CRR)
KEXIM ASIA's CR Assessment of Aa2(cr) and CRRs of Aa2 are positioned, before government support, three notches above the Adjusted BCA under Moody's Advanced LGF analysis. The notching uplift reflects Moody's view of very low LGF for the senior obligations represented by the CR Assessment, given the subordination of the bank's deposits, expected future senior unsecured obligations and shareholder's equity. The CR Assessment and CRRs also benefits from a three-notch uplift based on government support, under Moody's assumption of a government-backed level of support from Korea.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD MOVE THE RATINGS UP
KEXIM ASIA's ratings may be upgraded if its parent KEXIM's long-term debt ratings are upgraded.
KEXIM's long-term debt ratings could be upgraded if (1) Korea's sovereign rating is upgraded; and (2) the deficiency guarantee in the KEXIM Act remains in force. The deficiency guarantee in the KEXIM Act requires the government to replenish any deficit if KEXIM's reserves prove insufficient to absorb annual net losses.
For KEXIM ASIA, any changes in its liability structure and the resulting changes to the LGF-based uplift will not impact its deposit, issuer and counterparty risk ratings, because the government-backed level of support Moody's assumes for KEXIM ASIA will result in the ratings being rated at the same level as that of KEXIM.
WHAT COULD MOVE THE RATINGS DOWN
KEXIM ASIA's ratings may be downgraded if (1) KEXIM's long-term debt ratings are downgraded; (2) the bank's business deteriorates or its operations become less aligned with those of KEXIM; or (3) KEXIM ASIA becomes less strategically important to KEXIM.
The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
KEXIM ASIA LIMITED is headquartered in Hong Kong and reported assets of USD419 million at the end of June 2020.
LIST OF ASSIGNED RATINGS AND ASSESSMENTS
- Long-term foreign currency and local currency deposit ratings of Aa2 with stable outlook
- Short-term foreign currency and local currency deposit ratings of P-1
- Long-term foreign currency and local currency issuer ratings of Aa2 with stable outlook
- Long-term foreign currency and local currency counterparty risk ratings of Aa2
- Short-term foreign currency and local currency counterparty risk ratings of P-1
- Long-term counterparty risk assessment of Aa2(cr)
- Short-term counterparty risk assessment of P-1(cr)
- Baseline Credit Assessment and Adjusted Baseline Credit Assessment of baa2
- Outlook is stable REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Tae Jong Ok Asst Vice President - Analyst Financial Institutions Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Sophia Lee, CFA Associate Managing Director Financial Institutions Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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