Fitch upgrades Woori Bank's VR to bbb+

Reflecting rating relativities among largest commercial banks.

Fitch Ratings has affirmed Korea-based Woori Bank's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Simultaneously, Fitch has upgraded Woori Bank's Viability Rating (VR) to 'bbb+' from 'bbb'.

According to a release from Fitch Ratings, the upgrade of Woori Bank's VR mainly reflects Fitch's view about rating relativities among Korea's largest commercial banks - two of which are still rated two notches higher - on a forward-looking basis considering recent developments at the system level and bank-specific level.

Firstly, Korea's authorities have adopted more aggressive policies to support economic growth and ease the financial burden on borrowers, although such pro-consumer steps have had the effect of constraining the banking system's revenue and growth prospects.

This has been reinforced by stricter oversight by the regulators. At the same time, system asset quality has benefited, and none more so than at Woori Bank. This also reflects management's greater focus on reducing risk. Both areas, in which the bank lags peers, have historically constrained Woori Bank's VR.

Here's more from Fitch Ratings:

Woori Bank's VR takes into account its strong franchise in Korea, where it is the second-largest bank by assets and deposits. Woori Bank has consistently maintained sound capitalisation and margins, but recently that has been made more challenging by the operating environment which is putting pressure on sector profitability.

However, it also considers the bank's risk controls and asset quality - both of which still lag its large domestic peers - to have improved recently. This reflects positively on management quality, which historically has been compromised by turnover at senior levels.

Another key factor is the bank's funding/liquidity profile, with a reliance on foreign currency wholesale funding, although this is not unique to Woori Bank; in fact the bank's funding profile has improved over the past five years.

Its precautionary-and-below (PBL) loans ratio (3.6% at end-2014) compares unfavourably with the commercial bank average (about 2.5%), although it has improved significantly from a peak of 6.3% at end-2010.

Woori Bank's growth appetite has declined recently as its management has focused on the sale of KDIC's controlling stake in the bank. That said, a focus on mortgage loans in recent years has seen its loan book expand on average by about 5% a year.

Woori Bank's long-term underlying profitability has weakened due to softer economic growth, falling interest rates, various regulatory-driven costs and continued social and political pressure on the margins and fees of Korean financial institutions. Nevertheless, credit costs have improved and Fitch expects Woori Bank's return on assets to be 0.3%-0.4% over the near term.

The bank is highly likely to be designated a "domestic systemically important bank" (D-SIB) in Korea by the regulator in 2016, meaning the likely imposition of higher capital standards.

This, a more disciplined approach to loan growth, and a heightened focus on originating better quality assets than in the past, leads Fitch to expect Woori Bank to progressively strengthen its Fitch Core Capital (FCC) ratio, which was 10.2% at end-2014. Fitch notes the FCC ratio fell from end-2013, but this reflects Woori Bank's simultaneous merger with its parent and re-consolidation with Woori Card rather than any fundamental deterioration in the bank's own capitalisation.

Woori Bank's loans/customer deposits ratio weakened to 125% in 2014 from 118% in 2013, mainly due to the consolidation of Woori Card. Nevertheless, the bank is compliant with local prudential guidelines concerning funding and liquidity. Like its local peers, Woori is dependent upon foreign-currency wholesale funding to support foreign-currency lending, but it is mostly long-term in nature.