Korean banks surpass US, Japanese rivals in credit ratings

Amid the credit rating downgrade of major banks in advanced economies in the wake of the U.S. and European sovereign debt crises, major Korean banks have higher credit ratings than their overseas counterparts.

While the profitability of overseas banks has worsened, those in Korea have shown improvements in capital structure including asset quality.

Financial industry sources said Monday that international credit ratings agency Fitch has introduced a credit assessment methodology to boost the credibility of international credit rating agencies, which has declined following the global financial crisis in 2008.

A measurement of “viability ratings” criteria of the new methodology showed that both KB Kookmin and Shinhan banks received an “A” credit rating. They were among the top 17 percent of global financial institutions based on this rating, which is one notch higher than “A-“ posted by the largest bank in the U.S., Bank of America, and Japan’s biggest bank Tokyo Mitsubishi.

○ World’s top bank is Santander

Spain’s largest bank Santander received the highest rating of “AA,” becoming the only bank in the world to get that rating. Its aggressive acquisition strategies since the 2008 crisis have coupled with localization efforts boosted its asset size and profitability.

HSBC of the U.K., BNP Paribas of France and JPMorgan of the U.S. have followed suit.

The credit ratings of KB Kookmin and Shinhan were the fourth highest in the world and on par with those of ING of the Netherlands and Bank of China. Banks with ratings one notch below were Bank of America and Citigroup of the U.S., Tokyo Mitsubishi and Royal Bank of Scotland.

Yet Fitch’s “long-term issuer default ratings” for Bank of America and Citigroup were higher than those of KB Kookmin and Shinhan, apparently due to a higher “support rating” that includes potential government support. Long-term issuer rating is driven by the rating of an issuer’s viability or support, with the higher rating between the two being selected.

The resilience of global banks is far weaker than that of Korean banks, however. Moody’s downgraded the credit ratings of Bank of America, Wells Fargo and Citigroup last month, citing less room for government support.

Jang Hye-gyu, director of Fitch Korea`s desk overseeing financial institutions, said, “Korean banks have relatively higher viability ratings thanks to improved managing capital adequacy and asset soundness," adding, "Fitch’s announcement of viability ratings is expected to boost the international creditworthiness of KB Kookmin and Shinhan banks, which are likely to attract more foreign investment when issuing bonds.”

○ Why Fitch introduced the new criteria

When Fitch grants long-term credit issuer default ratings to banks, it selects the higher rating between viability and support ratings that consider potential support from a third party such as a bank’s majority shareholder or the government. In other words, banks can get high ratings if they have the potential to get financial support from a third party even if they have relatively weaker resilience.

With less room for the government to bail out debt-ridden banks in the wake of the global financial crisis, however, the viability rating has increasingly gained more importance. The rating is assessed based on customer loyalty, market share, profitability indicators including return on assets and return on equity, capital structure including equity capital and debt ratio, and governance structure.

dew@donga.com