Fitch Maintains AA- Credit Ratings for Three National Policy Banks... Strong Backing from Government

Even if banks incur losses, the government will compensate for the losses

[Asia Economy Reporter Park Sun-mi] Despite the COVID-19 situation, international credit rating agencies have maintained the credit ratings and outlooks for the three policy banks: KDB Industrial Bank, Korea Eximbank, and IBK Industrial Bank. The decisive factor in maintaining the credit ratings was the government's support to cover losses, even if the possibility of bank insolvency increased due to active support for COVID-19 affected groups.

On the 8th, Fitch, considered the most conservative among international credit rating agencies, maintained the credit ratings of KDB Industrial Bank, Korea Eximbank, and IBK Industrial Bank at ‘AA-’ with a ‘Stable’ outlook.

According to Fitch’s credit rating standards, ‘AA-’ is the fourth highest rating. It is the same as South Korea’s sovereign credit rating of ‘AA- (Stable)’. Fitch, which downgraded the credit ratings of advanced countries such as the UK due to concerns over increasing fiscal deficits during the COVID-19 response, warned that "if the debt-to-GDP ratio rises to 46% by 2023, it could exert downward pressure on the sovereign credit rating in the medium term." However, by maintaining the credit rating this time, the three policy banks also benefited from the rating maintenance.

Fitch’s common view on the three banks was that "the Korean government is very likely to support the banks if necessary," adding, "According to the Industrial Bank Act, Export-Import Bank Act, and Industrial Bank of Korea Act, the government compensates for losses when the banks incur net losses, ensuring creditor rights are firmly protected."

Separately, Fitch stated regarding KDB Industrial Bank and Korea Eximbank, "They are taking various measures to mitigate the disruptions caused by COVID-19, and we believe the government will promptly inject funds as needed to support their enhanced policy roles," but also noted, "If the relationship with the Korean government weakens, the credit rating could be downgraded." Regarding IBK Industrial Bank, Fitch commented, "The government’s capital injection of 1.3 trillion won after COVID-19 played a sufficient capital buffer role, despite IBK’s 12% increase in SME loans last year."

Fitch’s maintenance of the credit ratings for the three policy banks came amid warnings that the risk of insolvency for policy banks could increase once financial support measures such as loan maturity extensions and interest payment deferrals for SMEs and small business owners struggling due to COVID-19 end.

According to the Financial Supervisory Service, as of March, the average ratio of non-performing loans (NPLs) among domestic banks was 0.62%, with the three policy banks ranking highest among 19 domestic banks: KDB Industrial Bank at 2.46%, Korea Eximbank at 1.10%, and IBK Industrial Bank at 1.05%. This reflects the policy banks’ more proactive and broader support measures for COVID-19 vulnerable groups compared to commercial banks.

Meanwhile, benefiting from stable credit ratings last year, the policy banks successfully issued ultra-low interest foreign currency bonds at negative rates consecutively, and by maintaining high credit ratings this year, they will be able to raise funds at low interest rates in the global bond market.

This content was produced with the assistance of AI translation services.